Question

Top executive officers of Tildon Company, a merchandising firm, are preparing the next year’s budget. The controller has provided everyone with the current year’s projected income statement.

Sales revenue	$	1,600,000
Cost of goods sold		1,120,000
Gross profit		480,000
Selling & administrative expenses		190,000
Net income	$	290,000
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 $30,000. The president has announced that the company’s goal is to increase net income by 15 percent.

Required

The following items are independent of each other:

A Prepare a pro forma income statement. What percentage increase in sales would enable the company to reach its goal?

B The market may become stagnant next year, and the company does not expect an increase in sales revenue. The production manager believes that an improved production procedure can cut cost of goods sold by 2 percent. Prepare a pro forma income statement still assuming the President's goal to increase net income by 15 percent. Calculate the required reduction in selling & administrative expenses to achieve the budgeted net income.

C The company decides to escalate its advertising campaign to boost consumer recognition, which will increase selling and administrative expenses to $230,000. 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. Will the company reach its goal?

Answer 1

a)
Projected Income Statement
Sales (W/Note-1)	$1,817,500.00
Less: COGS = 70% of Sales	$1,272,250.00
Gross Profit	$545,250.00
Less: Sales and administrative expense (30000+ 10% of Sales)	$211,750.00
Net Income	$333,500.00
		b)
Sales revenue	$1,600,000.00
Less: Cost of goods sold = (1120000 x 98%)	$1,097,600.00
Gross profit	$502,400.00
Selling & administrative expenses (difference)	$168,900.00
Net income	$333,500.00
		c)
Sales revenue ($1600000*1.15)	$1,840,000.00
Less: Cost of goods sold ( 70% of sales)	$1,288,000.00
Gross profit	$552,000.00
Selling & administrative expenses (difference)	$230,000.00
Net income	$322,000.00
Yes, Company reach its goal .
W/Note-1Computation of Projected Sales
Projected Net Income ( $290000X1.15)	$333,500.00
Let assume Sales be X
Sales	X
Cost of Goods Sold	0.70X
Selling & Administrative expense	0.10X+30000
Total Expected Cost	=0.70X+0.10X+30000
Net Income = Sales-COGS-Selling & Admin Expense
333500= X-(0.70X+0.10X+30000)
333500=X-0.80X-30000
363500=0.20X
X=$1817500
Hence Projected Sales will be $1817500