Problem 5 George Washington Company buys one kind of merchandise at $12 per unit and sells it at $25 per unit. The company's sales representatives receive a 20% commission on each sale. The March Income Statement shows the following information:
George Washington Company Income Statement
ForMonth Ended March 31
Sales Cost of goods sold Gross profit Expenses: Sales commissions Advertising Store rent Administrative salaries Depreciation Other Total expenses Net Income
$500,000
240.000
$260,000
$100,000 50,000 5,000 10,000 6,000 12,000
$183,000 $...77.000
The company's management believes that the March results will be repeated during April, May.
Management believes that unit sales will increase at a rate of 8% each month during the next quarter (including April) if the item's selling price is reduced to $22.50 per unit and if advertising expenses are increased by 40% and remain at that level for all three months. Even if these changes are made, the purchase price will remain at $12 per unit. Under this plan, the sales representatives would continue to earn a 20% commission and all other expenses would remain unchanged.
Required: Using a three-column format, prepare budgeted income statements for April, May, and June that show the expected results of implementing the proposed changes. Based on the information in the budgeted income statements, recommend whether management should implement the plan.
