Log out Go to App
Go to App

Learning Materials

Features

Discover

Chapter 22: 55PGB (page 1260)

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. 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.

Short Answer

Expert verified

Holly should choose option 1.

Step by step solution

01

Preparation of budget under both options 

Option 1:

HOLLY COMPANY

Budgeted Income Statement

For the quarter ended March 31, 2018

January

February

March

Total

Net sales revenue (30% increase per month)

$8,000

$10,400

$13,520

$31,920

Cost of Goods Sold (40% of sales)

3,200

3,840

4,608

11,648

Gross profit

4,800

6,560

8,912

20,272

S&A Expenses ($2,700 + 10% of sales)

3,500

3,740

4,052

11,292

Operating income

1,300

2,820

4,860

8,980

Income Tax Expense (30% of operating income)

390

846

1,458

2,694

Net Income

$910

$1,974

$3,402

$6,286

02

Preparation of budget under both options 

Option 2:

HOLLY COMPANY

Budgeted Income Statement

For the quarter ended March 31, 2018

January

February

March

Total

Net sales revenue (30% increase per month)

$8,000

$10,400

$13,520

$31,920

Cost of Goods Sold (45% of sales)

3,600

4,680

6,084

14,364

Gross profit

4,400

5,720

7,436

17,556

S&A Expenses ($2,000 + 10% of sales)

2,800

2,960

3,152

8,912

Operating income

1,600

2,760

4,284

8,644

Income Tax Expense (30% of operating income)

480

828

1285

2,593

Net Income

$1,120

$1,932

$2,999

$6,051

03

Sensitivity Analysis

Holly should choose option 1 because under option 1 the company will earn $6,286.

Unlock Step-by-Step Solutions & Ace Your Exams!

  • Full Textbook Solutions

    Get detailed explanations and key concepts

  • Unlimited Al creation

    Al flashcards, explanations, exams and more...

  • Ads-free access

    To over 500 millions flashcards

  • Money-back guarantee

    We refund you if you fail your exam.

Start your free trial

Over 30 million students worldwide already upgrade their learning with Vaia!

One App. One Place for Learning.

All the tools & learning materials you need for study success - in one app.

Get started for free

Most popular questions from this chapter

Camp Company is a sporting goods store. The company sells a tent that sleeps six people. The store expects to sell 250 tents in 2018 and 280 tents in 2019. At the beginning of 2018, Camp Company has 25 tents in Merchandise Inventory and desires to have 5% of the next year’s sales available at the end of the year. How many tents will Camp Company need to purchase in 2018?

Preparing a financial budget—schedule of cash receipts and schedule of cash payments

Agua Cool is a distributor of bottled water. For each of the items, compute the amount of cash receipts or payments Agua Cool will budget for September. The solution to one item may depend on the answer to an earlier item.

a. Management expects to sell equipment that cost \(14,000 at a gain of \)7,000. Accumulated depreciation on this equipment is \(5,000.

b. Management expects to sell 7,100 cases of water in August and 9,000 cases in September. Each case sells for \)14. Cash sales average 20% of total sales, and credit sales make up the rest. Three-fourths of credit sales are collected in the month of the sale, with the balance collected the following month.

c. The company pays rent and property taxes of $4,500 each month. Commissions and other selling expenses average 30% of sales. Agua Cool pays one-half of commissions and other selling expenses in the month incurred, with the balance paid the following month.

Preparing a financial budget—budgeted income statement and balance sheet

Ballentine Company has the following post-closing trial balance on December 31, 2018:

The company’s accounting department has gathered the following budgeting information for the first quarter of 2019:

Budgeted total sales, all on account $ 305,500 Budgeted direct materials to be purchased and used 40,000 Budgeted direct labor cost 12,500 Budgeted manufacturing overhead costs: Variable manufacturing overhead 2,600 Depreciation 800 Insurance and property taxes 1,100 Budgeted cost of goods sold 71,300 Budgeted selling and administrative expenses: Salaries expense7,000 Rent expense 3,500 Insurance expense 2,000 Depreciation expense 350 Supplies expense 3,055 Budgeted cash receipts from customers 263,500 Budgeted income tax expense 44,000 Budgeted purchase and payment for capital expenditures

(additional equipment) 34,000

Additional information:

a. Direct materials purchases are paid 50% in the quarter purchased and 50% in the next quarter.

b. Direct labor, ma following budgeted income statement manufacturing overhead, selling and administrative costs, and income tax expense are paid in the quarter incurred.

c. Accounts payable at December 31, 2018 are paid in the first quarter of 2019. Requirements

1. Prepare Ballentine Company’s budgeted income statement for the first quarter of 2019.

2. Prepare Ballentine Company’s budgeted balance sheet as of March 31, 2019.

Preparing a financial budget—schedule of cash receipts, schedule of cash payments, cash budget

Beasley Company’s budget committee provides the following information:

December 31, 2017, account balances:

Cash \( 32,000 Accounts Receivable 19,000 Merchandise Inventory 16,000 Accounts Payable 15,000 Salaries and Commissions Payable 2,900 Budgeted amounts for 2018:

January February Sales, all on account \) 84,000 $ 84,400 Purchases, all on account 41,000 41,600 Commissions Expense 4,200 4,220 Salaries Expense 5,000 5,000 Rent Expense 2,200 2,200 Depreciation Expense 500 500 Insurance Expense 200 200 Income Tax Expense 1,900 1,900

Requirements

1. Prepare the schedule of cash receipts from customers for January and February 2018. Assume cash receipts are 80% in the month of the sale and 20% in the month following the sale.

2. Prepare the schedule of cash payments for purchases for January and February 2018. Assume purchases are paid 70% in the month of purchase and 30% in the month following the purchase.

3. Prepare the schedule of cash payments for selling and administrative expense for January and February 2018. Assume 25% of the accrual for Salaries and Commissions Payable is for commissions and 75% is for salaries. The December 31 balance will be paid in January. Salaries and commissions are paid 70% in the month incurred and 30% in the following month. Rent and income tax expenses are paid as incurred. Insurance expense is an expiration of the prepaid amount.

4. Prepare the cash budget for January and February. Assume no financing took place.

Crowley Company projects the following sales:

January February March

Cash sales (25%) \( 5,000 \) 5,500 \( 6,000

Sales on account (75%) 15,000 16,500 18,000

Total sales \) 20,000 \( 22,000 \) 24,000

Crowley collects sales on account in the month after the sale. The Accounts Receivable balance on January 1 is \(13,500, which represents December’s sales on account. Crowley projects the following cash receipts from customers:

January February March

Cash receipts from cash sales \) 5,000 \( 5,500 \) 6,000

Cash receipts from sales on account 13,500 15,000 16,500

Total cash receipts from customers \( 18,500 \) 20,500 $ 22,500

Recalculate cash receipts from customers if total sales remain the same but cash sales are only 20% of the total.
See all solutions

Recommended explanations on Business Studies Textbooks

Influences On Business

Read Explanation

Business Operations

Read Explanation

Managerial Economics

Read Explanation

Strategic Analysis

Read Explanation

Intermediate Accounting

Read Explanation

Business Development

Read Explanation
View all explanations

What do you think about this solution?

We value your feedback to improve our textbook solutions.

Study anywhere. Anytime. Across all devices.

Sign-up for free