Question: Computa-Cations buys its product for $20 and sells it for $50 per unit. The sales staff receives a 10% commission on the sale of each unit. Its June income statement follows.
Management expects June's results to be repeated in July, August, and September without any changes in strategy. Management, however, has another plan. It believes that unit sales will increase at a rate of 10% each month for the next three months (beginning with July) if the item's selling price is reduced to $45 per unit and advertising expenses are increased by 20% and remain at that level for all three months. The cost of its product will remain at $20 per unit, the sales staff will continue to earn a 10% commission, and the remaining expenses will stay the same.
Required: 1. Prepare budgeted income statements for each of the months of July, August, and September that show the expected results from implementing the proposed changes. Use a three-column format, with one column for each month.
Analysis Component
2. Use the budgeted income statements from part 1 to recommend whether management should implement the proposed plan. Explain.