Bill Hildebrand and Melissa Nordhaus opened Party-Time T-Shirts to sell T-shirts for parti...

Bill Hildebrand and Melissa Nordhaus opened Party-Time T-Shirts to sell T-shirts for parties at their college. The company completed the first year of operations, and the owners are generally pleased with operating results as shown by the following income statement:

Hildebrand and Nordhaus are considering how to expand the business. They each propose a way to increase profits to $100,000 during 2012.

a. Hildebrand believes they should advertise more heavily. He believes additional advertis­ing costing $20,000 will increase net sales by 30% and leave general expense unchanged. Assume that Cost of goods sold will remain at the same percentage of net sales as in 2011, so if net sales increases in 2012, Cost of goods sold will increase proportionately.

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b. Nordhaus proposes selling higher-margin merchandise, such as party dresses, in addition to the existing product line. An importer can supply a minimum of 1,000 dresses for $40 each; Party-Time can mark these dresses up 100% and sell them for $80. Nordhaus realizes they will have to advertise the new merchandise, and this advertising will cost $5,000. Party-Time can expect to sell only 80% of these dresses during the coming year.

Requirement

1. Help Hildebrand and Nordhaus determine which plan to pursue. Prepare a single-step income statement for 2012 to show the expected net income under each plan