Question

P22-55B

Question Help P22-55B (similar to) Ivey Company prepared the following budgeted income statement for the first quarter of 2018: Click the icon to view the budgeted income statement) Ivey Company is considering two options (Click the icon to view the options) Read the requirements Requirement 1. Prepare budgeted income statements for both options, assuming both options begin in January and January sales remain $25,000. Round all calculations to the nearest dollar Begin by preparing the budgeted income statement for Option 1. Ivey Company Budgeted Income Statement For the Quarter Ended March 31, 2018 January $ 25,000 5,000 Sales Revenue Cost of Goods Sold on nnn

Answer 1

Solution

Ivey Company

1. Budgeted income statement for both options assuming both options begin in January 1:

Option 1 – increase in advertising expenses by $1,200 per month -

	Ivey Company
	Budgeted Income Statement
	For the Quarter Ended March 31, 2018
	January	February	March	Quarter
Sales (monthly increase by 25%)	$25,000	$31,250	$39,063	$95,313
Cost of goods sold (20% of sales)	$5,000	$6,250	$7,813	$19,063
Gross Profit	$20,000	$25,000	$31,250	$76,250
S and A Expenses	$7,200	$7,950	$8,888	$24,038
Operating Income	$12,800	$17,050	$22,362	$52,212
Income tax expense	$2,560	$3,410	$4,472	$10,442
Net Income	$10,240	$13,640	$17,890	$41,770

Computations:

Option 1:

Increase advertising expenditure by $1,200 per month

Sales increase by 25% -

January sales = 25,000

February sales = 25,000 + 25% x 25,000 = $31,250

March sales = 31,250 + 25% x 31,250 = $39,063

Cost of goods sold - 20% of sales

January = 20% x 25,000 = 5,000

February = 20% x 31,250 = 6,250

March = 20% x 39,063 = 7,813

S and A Expenses –

Increase in advertising expenses by $1,200

January = 3,000 + 1,200 + 12% x 25,000 = $7,200

February = 3,000 + 1,200 + 12% x 31,250 = 7,950

March = 3,000 + 1,200 + 12% x 39,063 = $8,888

Option 2: increase cos to goods sold to 25%

	Ivey Company
	Budgeted Income Statement
	For the Quarter Ended March 31, 2018
	January	February	March	Quarter
Sales	$25,000	$31,250	$39,063	$95,313
Cost of goods sold (25% of sales)	$6,250	$7,813	$9,766	$23,829
Gross Profit	$18,750	$23,437	$29,297	$71,484
S and A Expenses	$6,000	$6,750	$7,688	$20,438
Operating Income	$12,750	$16,687	$21,609	$51.046
Income tax expense (20% of operating income)	$2,550	$3,337	$4,322	$10,209
Net Income	$10,200	$13,350	$17,287	$40,837

Computations:

Sales increase by 25% -

January sales = 25,000

February sales = 25,000 + 25% x 25,000 = $31,250

March sales = 31,250 + 25% x 31,250 = $39,063

Cost of goods sold - 25% of sales

January = 25% x 25,000 = 6,250

February = 25% x 31,250 = 7,813

March = 25% x 39,063 = 9,766

S and A Expenses –

January = 3,000 + 12% x 25,000 = $6,000

February = 3,000 + 12% x 31,250 = 6,750

March = 3,000 + 12% x 39,063 = $7,688

On comparison, Option 1 results in a higher net income by $933 for the quarter ended March 31, 2018 than the net income under the Option 2. Hence, the among the two options, the company might choose Option 1.

However, the net income under the both the options is less compared to the company’s original budgeted income statement net income of $42,304.

Hence, the company might prefer not to choose any option and retain its original budgeted income statement.