2-48 CVP and Financial Statements for a Mega-Brand Company Procter & Gamble Comp

Question

2-48 CVP and Financial Statements for a Mega-Brand Company
Procter & Gamble Company is a Cincinnati-based company that produces household products under brand names such as Gillette, Bounty, Crest, Folgers, and Tide. The company’s 2006 income statement
showed the following (in millions):

Net sales $68,222
Costs of products sold 33,125
Selling, general, and administrative expense 21,848
Operating income $13,249

Suppose that the cost of products sold is the only variable cost; selling, general, and administrative expenses are fixed with respect to sales.
Assume that Procter & Gamble had a 10% increase in sales in 2007 and that there was no change in costs except for increases associated with the higher volume of sales. Compute the predicted 2007 operating income for Procter & Gamble and its percentage increase.
Explain why the percentage increase in income differs from the percentage increase in sales.

Explanation / Answer

At 110 %

At 100%

At 110 %

Net Sales 68222 75044.2 Cost of Product Sold 33125 36437.5 Selling, general, and administrative expenses 21848 21848 Operating Income 13249 16759 Income % in sales 19.42% 22.33%

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