Using sensitivity analysisCaputo Company prepared the following budgeted income statement for the first quarter of 2018:Caputo Company is considering two options. Option 1 is to increase advertising by $1,100 per month. Option 2 is to use better-quality materials in the manufacturing process. The better materials will increase the cost of goods sold to 55% but will provide a better product at the same sales price. The marketing manager projects either option will result in sales increases of 25% per month rather than 20%.RequirementsPrepare budgeted income statements for both options, assuming both options begin in January and January sales remain $10,000. Round all calculations to the nearest dollar.Which option should Caputo choose? Explain your reasoning. CAPUTO COMPANYBudgeted Income StatementFor the Quarter Ended March 31, 2018JanuaryFebruaryMarchTotalNet Sales Revenue (20% increase per month)$ 10,000$ 12,000$ 14,400 $ 36,400Cost of Goods Sold (50% of sales)5,0006,0007,20018,200Gross Profit5,0006,0007,20018,200S&A Expenses($3,000 + 5% of sales)3,5003,6003,72010,8207,380Operating Income1,5002,4003,480Income Tax Expense (30% of operating income)4507201,0442,214Net Income$ 1,050$ 1,680$ 2,436$ 5,165

Sensitivity analysis is a what-if’ analysis based financial model that determines how the variables…

CAPUTO COMPANY Budgeted Income Statement For the Quarter Ended March 31, 2018 January February March Total Net Sales Revenue (20% increase per month)$ 10,000$ 12,000 $ 14,400 $ 36,400 Cost of Goods Sold (50% of sales) 5,000 6,000 7,200 18,200 Gross Profit 5,000 6,000 7,200 18,200 S&A Expenses ($3,000 + 5% of sales) 3,500 3,600 3,720 10,820 7,380 Operating Income 1,500 2,400 3,480 Income Tax Expense (30% of operating income) 450 720 1,044 2,214 Net Income $ 1,050 $ 1,680 $ 2,436 $ 5,165

CAPUTO COMPANY Budgeted Income Statement For the Quarter Ended March 31, 2018 January February March Total Net Sales Revenue (20% increase per month)$ 10,000$ 12,000 $ 14,400 $ 36,400 Cost of Goods Sold (50% of sales) 5,000 6,000 7,200 18,200 Gross Profit 5,000 6,000 7,200 18,200 S&A Expenses ($3,000 + 5% of sales) 3,500 3,600 3,720 10,820 7,380 Operating Income 1,500 2,400 3,480 Income Tax Expense (30% of operating income) 450 720 1,044 2,214 Net Income $ 1,050 $ 1,680 $ 2,436 $ 5,165

Cornerstones of Financial Accounting

4th Edition

ISBN:9781337690881

Author:Jay Rich, Jeff Jones

Publisher:Jay Rich, Jeff Jones

Chapter5: Sales And Receivables

Section: Chapter Questions

Problem 57BE

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