QuestionQuestion

Merline, a one-product mail-order firm, buys its product for $70 per unit and sells it for $138 per unit. The sales staff receives a 10% commission on the sale of each unit. Its December income statement follows.

MERLINE COMPANY
Income Statement
For Month Ended December 31, 2013
Sales $ 1,380,000
Cost of goods sold 700,000
________________________________________ ________________________________________
Gross profit 680,000
Expenses
    Sales commissions (10%) 138,000
    Advertising 216,000
    Store rent 24,800
    Administrative salaries 44,000
    Depreciation 54,000
    Other expenses 12,800
________________________________________ ________________________________________
    Total expenses 489,600
________________________________________ ________________________________________
Net income $ 190,400
________________________________________________________________________________ ________________________________________________________________________________
________________________________________


Management expects December’s results to be repeated in January, February, and March of 2014 without any changes in strategy. Management, however, has an alternative plan. It believes that unit sales will increase at a rate of 10% each month for the next three months (beginning with January) if the item's selling price is reduced to $123 per unit and advertising expenses are increased by 20% and remain at that level for all three months. The cost of its product will remain at $70 per unit, the sales staff will continue to earn a 10% commission, and the remaining expenses will stay the same.

Required:

Prepare budgeted income statements for each of the months of January, February, and March that show the expected results from implementing the proposed changes.

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MERLINE COMPANY
Income Statement
For the months ended January 31, February 28, and March 31, 2014

January February March

Budgeted Sales 1,353,000.00 1,488,300.00 1,637,130.00...
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