P22-55B Using sensitivity analysis Holly Company prepared the following budgeted income statement for the first quarter of 2018: HOLLY COMPANY Budgeted Income Statement For the Quarter Ended March 31, 2018 Total March January February Net Sales Revenue $ 11,520 $ 29,120 Cost of Goods Sold (40% of sales) (20% increase per month) $ 8,000 $ 9,600 4,608 11,648 3,200 3,840 Gross Profit 6,912 17,472 4,800 5,760 S&A Expenses ($2,000 + 10% of sales) 2,800 2,960 3,152 8,912 Operating Income 2,000 2,800 3,760 8,560 Income Tax Expense (30% of operating income) 840 1,128 2,568 600 Net Income $ 1,400 $ 1,960 $ 2,632 $ 5,992 Holly Company is considering two options. Option 1 is to increase advertising by $700 per month. Option 2 is to use better-quality materials in the manufacturing process. The better materials will increase the cost of goods sold to 45% but will provide a better product at the same sales price. The marketing manager projects either option will result in sales increases of 30% per month rather than 20%. Requirements 1. Prepare budgeted income statements for both options, assuming both options begin in January and January sales remain $8,000. Round all calculations to the nearest dollar. 2. Which option should Holly choose? Explain your reasoning.
P22-55B Using sensitivity analysis Holly Company prepared the following budgeted income statement for the first quarter of 2018: HOLLY COMPANY Budgeted Income Statement For the Quarter Ended March 31, 2018 Total March January February Net Sales Revenue $ 11,520 $ 29,120 Cost of Goods Sold (40% of sales) (20% increase per month) $ 8,000 $ 9,600 4,608 11,648 3,200 3,840 Gross Profit 6,912 17,472 4,800 5,760 S&A Expenses ($2,000 + 10% of sales) 2,800 2,960 3,152 8,912 Operating Income 2,000 2,800 3,760 8,560 Income Tax Expense (30% of operating income) 840 1,128 2,568 600 Net Income $ 1,400 $ 1,960 $ 2,632 $ 5,992 Holly Company is considering two options. Option 1 is to increase advertising by $700 per month. Option 2 is to use better-quality materials in the manufacturing process. The better materials will increase the cost of goods sold to 45% but will provide a better product at the same sales price. The marketing manager projects either option will result in sales increases of 30% per month rather than 20%. Requirements 1. Prepare budgeted income statements for both options, assuming both options begin in January and January sales remain $8,000. Round all calculations to the nearest dollar. 2. Which option should Holly choose? Explain your reasoning.
Cornerstones of Financial Accounting
4th Edition
ISBN:9781337690881
Author:Jay Rich, Jeff Jones
Publisher:Jay Rich, Jeff Jones
Chapter5: Sales And Receivables
Section: Chapter Questions
Problem 57BE
Related questions
Concept explainers
Variance Analysis
In layman's terms, variance analysis is an analysis of a difference between planned and actual behavior. Variance analysis is mainly used by the companies to maintain a control over a business. After analyzing differences, companies find the reasons for the variance so that the necessary steps should be taken to correct that variance.
Standard Costing
The standard cost system is the expected cost per unit product manufactured and it helps in estimating the deviations and controlling them as well as fixing the selling price of the product. For example, it helps to plan the cost for the coming year on the various expenses.
Topic Video
Question
Transcribed Image Text:n 2 Feb. NI $1,876
-....
quarter of 2018:
HOLLY COMPANY
Budgeted Income Statement
For the Quarter Ended March 31, 2018
Total
March
February
Net Sales Revenue
January
$ 11,520
$ 29,120
(20% increase per month)
$ 8,000
$ 9,600
Cost of Goods Sold (40% of sales)
11,648
3,840
4,608
3,200
Gross Profit
6,912
17,472
4,800
5,760
S&A Expenses
2,960
3,152
8,912
($2,000 + 10% of sales)
2,800
Operating Income
3,760
8,560
2,000
2,800
Income Tax Expense (30% of operating income)
2,568
600
840
1,128
Net Income
$ 1,400
$ 1,960
$ 2,632
$ 5,992
Holly Company is considering two options. Option 1 is to increase advertising by $700
per month. Option 2 is to use better-quality materials in the manufacturing process.
The better materials will increase the cost of goods sold to 45% but will provide a
better product at the same sales price. The marketing manager projects either option
will result in sales increases of 30% per month rather than 20%.
Requirements
1. Prepare budgeted income statements for both options, assuming both options
begin in January and January sales remain $8,000. Round all calculations to the
nearest dollar.
2. Which option should Holly choose? Explain your reasoning.
Holly for the first
Expert Solution
This question has been solved!
Explore an expertly crafted, step-by-step solution for a thorough understanding of key concepts.
This is a popular solution!
Trending now
This is a popular solution!
Step by step
Solved in 2 steps
Knowledge Booster
Learn more about
Need a deep-dive on the concept behind this application? Look no further. Learn more about this topic, accounting and related others by exploring similar questions and additional content below.Recommended textbooks for you
Cornerstones of Financial Accounting
Accounting
ISBN:
9781337690881
Author:
Jay Rich, Jeff Jones
Publisher:
Cengage Learning
Intermediate Accounting: Reporting And Analysis
Accounting
ISBN:
9781337788281
Author:
James M. Wahlen, Jefferson P. Jones, Donald Pagach
Publisher:
Cengage Learning
Cornerstones of Financial Accounting
Accounting
ISBN:
9781337690881
Author:
Jay Rich, Jeff Jones
Publisher:
Cengage Learning
Intermediate Accounting: Reporting And Analysis
Accounting
ISBN:
9781337788281
Author:
James M. Wahlen, Jefferson P. Jones, Donald Pagach
Publisher:
Cengage Learning