Chapter 22, Problem 55BP

Using sensitivity analysis

Holly Company prepared the following budgeted income statement for the first quarter of 2018:

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. 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. 2. Which option should Holly choose? Explain your reasoning.