Question

Sales last year were $3,500,000, COGS was $1,950,000, overhead expenses (SG&A) were $750,000, depreciation was $350,000, and the tax rate was 21%. Calculate the projected net income using the percent of sales method if sales are expected to grow by 15%. (Do not put a dollar sign in the answer) Assume zero interest expense and that depreciation will not scale with sales.

Answer 1

The percentage of sales method is a forecasting method in which financial statement items are expressed as a percentage of sales.

First, you should compute the income statement items as a percent of sales

Amount as a % of sales = (Amount / Sales) * 100

	Amount	Amount as a percent of sales
Sales	3,500,000
COGS	(1,950,000)	(1950000/3500000) * 100 = 55.71428%
Gross margin	15,50,000	(1550000/3500000) * 100 = 44.28571%
less: SG&A	(750,000)	(750000/3500000) * 100 = 21.42857%
less: Depreciation	(3,50,000)
Income before tax	4,50,000
less: Tax @21%	94,500
Net income	3,55,500

Calculation of projected net income using the percent of sales method

		Amount
Sales	3500000 + 15%	40,25,000
less: COGS	4025000 * 55.71428%	(22,42,500)
Gross margin	4025000 * 44.28571%	17,82,500
less: SG&A	4025000 * 21.42857%	(8,62,500)
less: Depreciation		(3,50,000)
Income before tax		5,70,000
less: Tax @21%	570000 * 21%	(1,19,700)
Net income		4,50,300

Therefore, the projected net income using percent of sales method is $450,300