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.

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

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