Question

Top executive officers of Preston Company, a merchandising firm, are preparing the next year’s budget. The controller has provided everyone with the current year’s projected income statement. Current Year Sales revenue $ 3,200,000 Cost of goods sold 2,240,000 Gross profit 960,000 Selling & admin. expenses 380,000 Net income $ 580,000 Cost of goods sold is usually 70 percent of sales revenue, and selling and administrative expenses are usually 10 percent of sales plus a fixed cost of $60,000. The president has announced that the company’s goal is to increase net income by 15 percent.

b-1.	Prepare a pro forma income statement still assuming the President's goal to increase net income by 15 percent.

          

b-2.	Calculate the required reduction in selling & administrative expenses to achieve the budgeted net income.

        

c-1.	The company decides to escalate its advertising campaign to boost consumer recognition, which will increase selling and administrative expenses to $460,000. With the increased advertising, the company expects sales revenue to increase by 15 percent. Assume that cost of goods sold remains a constant proportion of sales. Prepare a pro forma income statement.

          

c-2.	Will the company be able to reach its goal?
	Yes No

Answer 1