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Bill Hildebrand and Melissa Nordhaus opened Party-Time T-Shirts to sell T-shirts for parties at...

Question:

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:

Hildebrand

Income Statement

Year ended date December 11, 2011

Net sales Revenue 350,000
Cost of goods sold 210,000
Gross margin: 140,000
Operating expenses:
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.

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.

Income Statement:

The income statement needs to be prepared at the end of every year to know the performance of the company. The performance of the company can be determined by the net earning earned by it and net earning can be calculated preparing the income statement.

Answer and Explanation:

Income Statement for Hildebrand Plan
Particular Amount $
Sales revenue (Increase in sales by 30%) 455,000
Less: Cost of goods sold (Increase in cost of goods sold by 30%) 273,000
Gross profit 182,000
Less:
Selling expenses 40,000
General expenses 25,000
Advertising 20,000
Net income 97,000

Income Statement for Nordhaus Plan
Particular Amount $
Sales revenue (Increased by 800 units @80) 455,000
Less: Cost of goods sold ( 800 x 40) 273,000
Gross profit 182,000
Less:
Selling expenses 40,000
General expenses 25,000
Advertising 20,000
Net income 97,000

From the above income statement, we found that the Nordhaus plan provides the more earning. So, it needs to be persued.


Learn more about this topic:

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Preparing Standard Cost Income Statements

from Accounting 301: Applied Managerial Accounting

Chapter 13 / Lesson 5
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