Top executive officers of Preston Company, a merchandising firm, are preparing t

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 $1,900,000 1,330,000 Sales revenue Cost of goods sold Gross profit Selling & admin expenses Net income 570,000 267 000 s 303,000 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 $77 ,000. The president has announced that the company's goal is to increase net income by 20 percent Required The following items are independent of each other a 1. Prepare a pro forma income statement PRESTON COMPANY Pro Forma Income Statement Sales revenue Cost of goods sold Gross profit Selling & administrative expenses Net income a2. What percentage increase in sales would enable the company to reach its goal? (Round your answer to 2 decimal places. 425-825-1641

Explanation / Answer

1 Let required sales be "X" for the year $ Sales Revenue X Less: Cost of goods sold ( $ 1900000 x 70%) (0.70 X) Gross Profit 0.30X Less: Selling and admin expenses ($ 77,000 + 0.10X) (77,000 + 0.10X) Net income ($ 303,000 + 20%) 363600 From the above calculation, $ 363600 + (77000 + 0.10X) = 0.30X X = ($ 363600+ $ 77,000)/0.20 = $2203000 Proforma income statement; $ Sales Revenue 2203000 Cost of goods sold 1542100 Gross Profit 660900 Less: Selling and admin expenses($77000+0.10X660900) 143090 Net income 517810 2 % of sales increase Increase in sales ($2203000- $1900000) 303000 % change is sales ($303000/$1900000) x 100 16% b Reduced cost of goods sold ($13,30,000 x 98%) 1303400 1b Proforma income statement; Sales Revenue 1900000 Cost of goods sold 1303400 Gross Profit 596600 Less: Selling and admin expenses ($596600-$517810) 78790 Net income 517810 2b required reduction of selling and admin expenses ($143090- $78790) 64300 1c Proforma income statement; Sales Revenue ($1900000 + 20%) 2280000 Cost of goods sold($1330000 x 70%) 931000 Gross Profit 1349000 Less: Selling and admin expenses 345000 Net income 1004000

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