Prepare and Evaluate Budgeted Income Statement Fairfield Stores, a retailer in a
ID: 2552293 • Letter: P
Question
Prepare and Evaluate Budgeted Income Statement Fairfield 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. (Round all amounts on the income statement to the nearest dollar.)
b. Should Fairfield’s management make the planned changes?
Explanation / Answer
The Management should not make the planned changes as there is fall in profits as compared to previous month of April
FAIRFIELD STORES Projected Income Statement for the Month Ended May 30, 2016 Sales 562500 Cost of goods sold240,000 300000 Gross profit 2,62,500 Operating expenses: Sales commissions expense 28125 Advertising expense 60,000 84000 Lease expense 20,000 20,000 Depreciation expense10,000 10,000 Salaries expense30,000 30,000 Other operating expenses 15000 Income before income taxes 75,375 Income tax expense 30,000 22612.5 Net income 52,763