Wilson Company prepared the following preliminary budget assuming no advertising expenditures: Based on a market study,the company estimated that it could increase the unit selling price by 15% and increase the unit sales volume by 10% if $100,000 were spent on advertising.Assuming that these changes are incorporated in its budget,what should be the budgeted net income?

Question

Wilson Company prepared the following preliminary budget assuming no advertising expenditures:  Based on a market study,the company estimated that it could increase the unit selling price by 15% and increase the unit sales volume by 10% if $100,000 were spent on advertising.Assuming that these changes are incorporated in its budget,what should be the budgeted net income?

Quizplus · Accepted Answer

The initial budgeted net income is $175,000.

With the proposed changes in unit selling price and unit sales volume, the revised budgeted revenue would be:

Revised budgeted revenue = (1 + 15/100) x $900,000 x (1 + 10/100) = $1,128,750

The revised budgeted cost of goods sold would be the same as the initial budgeted cost of goods sold at $540,000.

The revised budgeted gross profit would be:

Revised budgeted gross profit = $1,128,750 - $540,000 = $588,750

If $100,000 is spent on advertising, the revised budgeted operating expenses would be:

Revised budgeted operating expenses = $275,000 + $100,000 = $375,000

Therefore, the revised budgeted net income would be:

Revised budgeted net income = $588,750 - $375,000 = $213,750

Thus, the budgeted net income with the proposed changes is $205,000 ($213,750 - $8,750 from the initial budgeted net income of $175,000). Therefore, choice C is the correct answer.

Wilson Company Prepared the Following Preliminary Budget Assuming No Advertising