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Chapter 22: Q46PGB (page 1250)

Using sensitivity analysis Caputo Company prepared the following budgeted income statement for the first quarter of 2018:

Caputo Company is considering two options. Option 1 is to increase advertising by \(1,100 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 55% but will provide a better product at the same sales price. The marketing manager projects either option will result in sales increases of 25% per month rather than 20%.

Requirements

1. Prepare budgeted income statements for both options, assuming both options begin in January and January sales remain \)10,000. Round all calculations to the nearest dollar.

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

Short Answer

Expert verified
  1. Budget, option 1 - $4,239 and option 2 - $4,375
  2. Holly should choose option 2.

Step by step solution

01

Preparation of budget under both options

Option 1:

CAPUTO COMPANY

Budgeted Income Statement

For the quarter ended March 31, 2018

January

February

March

Total

Net sales revenue (25% increase per month)

$10,000

$12,500

$15,625

$38,125

Cost of Goods Sold (50% of sales)

5,000

6,250

7,813

19,063

Gross profit

5,000

6,250

7,812

19,062

S&A Expenses ($4,100 + 5% of sales)

4,600

4,725

4,881

14,206

Operating income

1,600

1,525

2,931

6,056

Income Tax Expense (30% of operating income)

480

458

879

1,817

Net Income

$1,120

$1,067

$2,052

$4,239

Option 2:

CAPUTO COMPANY

Budgeted Income Statement

For the quarter ended March 31, 2018

January

February

March

Total

Net sales revenue (25% increase per month)

$10,000

$12,500

$15,625

$38,125

Cost of Goods Sold (55% of sales)

5,500

6,875

8,594

20,969

Gross profit

4,500

5,625

7,031

17,156

S&A Expenses ($3,000 + 5% of sales)

3,500

3,625

3,781

10,906

Operating income

1,000

2,000

3,250

6,250

Income Tax Expense (30% of operating income)

300

600

975

1,875

Net Income

$700

$1,400

$2,275

$4,375

02

Sensitivity Analysis

Holly should choose option 2 because under option 1 the company will earn $4,375.

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Most popular questions from this chapter

Preparing a financial budget—budgeted income statement and balance sheet

Buncomb Companyhas 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 $ 121,700 Budgeted purchases of merchandise inventory,

all on account 61,200 Budgeted cost of goods sold 60,850 Budgeted selling and administrative expenses: Commissions expense 6,085 Salaries expense 3,000 Rent expense 4,100 Depreciation expense 900 Insurance expense 300 Budgeted cash receipts from customers 126,450 Budgeted cash payments for merchandise inventory 67,925 Budgeted cash payments for salaries and commissions 14,836 Budgeted income tax expense 4,700 Additional information:

Rent and income tax expenses are paid as incurred. Insurance expense is an expiration of the prepaid amount.

Requirements

  1. Prepare a budgeted income statement for the quarter ended March 31, 2019.
  2. 2. Prepare a budgeted balance sheet as of March 31, 2019.

Preparing an operating budget—selling and administrative expense budget

Consider the sales budget presented in Exercise E22-31. Slate’s selling and administrative expenses include the following:

Rent, \(2,000 per month

Salaries, \)4,000 per month

Commissions, 5% of sales

Depreciation, $1,000 per month

Miscellaneous expenses, 2% of sales

Prepare a selling and administrative expense budget for each of the three quarters of 2018 and totals for the nine-month period.

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.

What is the formula used to determine the number of units to be produced?

Preparing an operating budget—production budget Bailey Company expects to sell 1,500 units of finished product in January and 1,750 units in February. The company has 180 units on hand on January 1 and desires to have an ending inventory equal to 80% of the next month’s sales. March sales are expected to be 1,820 units. Prepare Bailey’s production budget for January and February.
See all solutions

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