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Mexia Inc. has been a wholesale distributor of automobile parts for domestic automakers for 20 years, Mexia has suffered through a recent slump in the domestic auto industry, and its performance has not rebounded to the level of the industry as a whole. Mexia's Income Statement for the year ended December 31, 2001 is as follows:

Mexia Inc

Income Statement

For the year Ended December 31, 2001 (in thousands)

Net Sales $9,000

Less: Cost of Goods Sold ($6,000)

Gross Profit $3,000

Less: Commercial Expenses:

Marketing Expenses $780

Administrative Expenses $900

Total Commercial Expenses ($1,680)

Income Before Interest and Taxes $1,320

Less: Interest Expense ($ 140)

Income Before Income Tax $1,280

Less: Income Tax ($ 512)

Net Income $ 768

Mexia's management team is considering the following actions for 2002, which they expect will improve profitability and collectively result in a 5% increase in unit sales:

a. Increase Sales Prices 10%

b, Increase advertising by $420,000 and hold all other marketing and administrative expenses at 2001 level.

c. Improve customer service by increasing average current assets (inventory and accounts receivable) by a total of $400,000, and hold all other assets at 2001 levels

d. Finance the additional assets at an annual interest rate of 10% and hold all other interest expense at 2001 levels.

e. Improve the quality of products carried, this will increase the unit cost of goods sold by 6%.

Mexia's 2002 effective income tax rate is expected to be 40% the same as 2001.

Required: Prepare a budgeted income statement for Mexia Inc. for the year ended December 31, 2002 assuming that planned actions would be carried out and that the 5% increase in unit sales would be realized.

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