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# Merline Company: preparation of a budgeted income statement

Preparation and analysis of budgeted income statement

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Question 3: (10 points)
Problem 7-4A: Preparation and analysis of budgeted income statements L.O. C3, P2
Merline, a one-product mail-order firm, buys its product for \$75 per unit and sells it for \$150 per unit. The sales
staff receives a 10% commission on the sale of each unit. Its December income statement follows:

MERLINE COMPANY
Budgeted Income Statement
For Month Ended December 31, 2008
Sales \$ 2,250,000
Cost of goods sold 1,125,000
Gross profit 1,125,000
Expenses
Sales commissions (10%) 225,000
Store rent 30,000
Depreciation 50,000
Other expenses 10,000
Total expenses 610,000
Net income \$ 515,000

Management expects December's results to be repeated in January, February, and March of 2009 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
\$125 per unit and advertising expenses are increased by 15% and remain at that level for all three months. The
cost of its product will remain at \$75 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. Use a three-column format, with one column for

MERLINE COMPANY
Budgeted Income Statement
For Months of January, February, and March
January February March
Sales \$ \$ \$
Cost of goods sold
Gross profit
Expenses
Sales commissions (10%)
Store rent
Depreciation
Other expenses
Total expenses
Net income(Loss) \$ \$ \$

#### Solution Preview

Problem 7-4A: Preparation and analysis of budgeted income statements L.O. C3, P2
Merline, a one-product mail-order firm, buys its product for \$75 per unit and sells it for \$150 per unit. The sales staff receives a 10% commission on the sale of each unit. Its

December income statement follows:

MERLINE COMPANY
Budgeted Income Statement
For Month Ended December 31, 2008

Sales \$ 2,250,000
Cost of goods sold 1,125,000
Gross profit 1,125,000
Expenses
Sales commissions (10%) 225,000