Question

Top executive officers of Baird 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	$	2,300,000
Cost of goods sold		1,725,000
Gross profit		575,000
Selling & administrative expenses		304,000
Net income	$	271,000

  
Cost of goods sold is usually 75 percent of sales revenue, and selling and administrative expenses are usually 10 percent of sales plus a fixed cost of $74,000. 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.

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

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.

The company decides to escalate its advertising campaign to boost consumer recognition, which will increase selling and administrative expenses to $347,000. 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

Part 1

Proforma Income Statement

Particulars	Amount
Sales	$2300000
Less - Cost of Goods Sold (75%)	$1725000
Gross Profit	$575000
Selling and Administrative Expenses	$304000
Net Income	$271000

Net Income With 15% = ($271000+15%) = $311650

Cobtribution Margin = Sales - Variable cost

Contribution Margin = 100% - (75%+10%) = 15%

Sales required to achieve $311650 = (Profit + Fixed cost)/Contribution Margin

Sales = ($311650+$74000)/15% = $2571000

Proforma Income Statement

Particulars	Amount
Sales revenue	$2571000
Less : Cost of goods sold (75%)	$1928250
Gross Profit	$642750
Selling and Administrative expenses ($74000) + ($2571000*10%)	$331100
Net Income	$311650

Part 2

Proforma Income Statement

Particulars	Amount
Sales Revenue	$2300000
Less : Cost of goods sold (73%)	$1679000
Gross Profit	$621000
Selling and Administrative expenses (Balance)	$309350
Net Income	$311650

Required Reduction in selling and Administrative expenses = ($331100 - $309350) = $21750

Part 3

Particulars	Amount
Sales ($2300000+15%)	$2645000
Less - Cost of Goods sold (75%)	$1983750
Gross Profit	$661250
Selling and Administrative expenses	$347000
Net Income	$314250
Yes, Company is Able to Reach Its Goal.