Bill Hildebrand and Melissa Nordhaus opened Party-Time T-Shirts to sell T-shirts for parties at their college. The company completed the first year of operations, and the owners are generally pleased with operating results, as shown by the following income statement:
- Party time t shirts
- Income statement
- Net sales revenue. $350,000
- Cost of goods sold. 210, 000
- Gross margin. 140, 000
- Operating expense
- Selling expense. 40,000
- General expense. 25,000
- Net income. 75,000
Hildebrand and Nordhaus are considering how to expand the business. They each propose a way to increase profits to $100,000 during 2012.
a. Hildebrand believes they should advertise more heavily. He believes additional advertising costing $20,000 will increase net sales by 30% and leave general expense unchanged.
b. Nordhaus proposes selling higher-margin merchandise, such as party dresses. An importer can supply a minimum of 1,000 dresses for $40 each; Party-Time can mark
these dresses up 100% and sell them for $80. Nordhaus realizes they will have to advertise the new merchandise, and this advertising will cost $5,000. Party-Time can expect to sell only 80% of these dresses during the coming year.
Requirement:
R1. Help Hildebrand and Nordhaus determine which plan to pursue. Prepare a single-step income statement for 2012 to show the expected net income under each plan.