Bush, Chaney, Obama and Biden Piece Works, Inc., a one-product mail order firm, buys its product for $60 per unit and sells it for $130 per unit. The sales staff receives a 10% commission on the sale of each unit. Its December 2012 income statement is on the attached handout.
Management expects December's results to be repeated in January and February 2013 without any change in strategy. Management, however, has an alternative plan. It believes the unit sales with increase at a rate of 10% each month for the next two months (beginning with January) if the item's selling price is reduced to $115 per unit and advertising expenses are increased by 25% over their previous cost and remain at the new level for those two months. The cost of its product will remain at $60 per unit, the sales staff will continue to earn a 10% commission on each sale and the remaining expenses will stay the same.
Required:
1. Prepare budgeted income statements for each of the months of January and February that show the expected results from implementing the proposed changes. Use a two column format, with one column for each month.
2. Use the budgeting income statements from Part 1 to recommend whether management should implement the proposed changes.