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:

Party time t shirts

Income statement

Net sales revenue. $350000

Cost of goods sold. 210 000

Gross margin. 140 000

Operating expense

Selling expense. 40000

General expense. 25000

Net income. 75000

Hildebrand and Nordhaus are considering how to expand the business. They each propose a way to increase profits to $100000 during 2012.

a. Hildebrand believes they should advertise more heavily. He believes additional advertising costing $20000 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 1000 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 $5000.
Party-Time can expect to

sell only 80% of these dresses during the coming year.

Requirement

R1. 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.