Problem
Prepare and Evaluate Budgeted Income StatementFairfield Stores, a retailer in a shopping mall, prepared the following income statement for its operations for the month just ended:
FAIRFIELD STORES
Income Statement
for the Month Ended April 30, 2016
Sales............................................................$500,000
Cost of goods sold.................................................240,000
Gross profit.......................................................$260,000
Operating expenses:
Sales commissions expense .......................................$25,000
Advertising expense ..............................................60,000
Lease expense ..................................................20,000
Depreciation expense.............................................10,000
Salaries expense.................................................30,000
Other operating expenses .........................................15,000 160,000
Income before income taxes .........................................$100,000
Income tax expense................................................ 30,000
Net income.......................................................$ 70,000
Sales commissions were 5% of sales. Income taxes were 30% of income before income taxes. Both should continue at the same rate for the remainder of the year.
Fairfield Stores is preparing the budget for the month of May 2016. If no basic changes are made, Fairfield management expects that the income statement would be virtually identical to the one for April. However, Fairfield's management has decided to make some changes in the operations. The plans include the following:
1. Increase advertising expense by 40%.
2. Decrease all selling prices by 10%.
3. Increase the number of units sold by 25% as a result of the ?rst two changes.
Required
a. Prepare a budgeted income statement for the month of May 2016.
b. Should Fairfield's management make the planned changes?