B. By what percentage did your net income change ? C. What are your current prof
ID: 2716143 • Letter: B
Question
B. By what percentage did your net income change ?
C. What are your current profit margin and your pro forma profit margin?
D. Using the percentage of sales method, determine if any additional financing is needed for your business next year? You have just completed the first year of operation for your business and have the following information: sales, $200,000; cost of goods, $140,000; rent, $18,000; utilities, $8,400; insurance, $2,000; equipment, $3,500; and interest, $10,000. Your forecast indicates that your sales will increase by 20 percent. Your rental agreement provides for a 3 percent increase per year You read an article indicating that utility costs in your area will increase by 10 percent next year. You just received a notice from your insurance company stating your quarterly premium is increasing to $600 beginning the first quarter of next year. Your equipment expense will not change, but the amortization schedule on your current loan indicates that interest expense for next year should be $9,000. 8
Explanation / Answer
A Income statement for the year (Amounts in Dollars ) Particulars Amount 1 Sales 200000 a Total Gross Income 200000 Less : Expenses 2 Cost of goods 140000 3 Rent 18000 4 Utilities 8400 5 Insurance 2000 6 Equipment 3500 7 Interest 10000 b Total Expenses 181900 c Total Net Income (A - B) 18100 Income statement for the next year (Amounts in Dollars ) Particulars Increase / Decrease from the previous year Amount 1 Sales Increase by 20 % ( 200000 + 20 % ) 240000 a Total Gross Income 240000 Less : Expenses 2 Cost of goods Increase by 20 % ( 140000 + 20 % ) 168000 3 Rent Increase by 3 % ( 18000 + 3 % ) 18540.00 4 Utilities Increase by 10 % ( 8400 + 10 % ) 9240.00 5 Insurance Premium will be 600 per quarter ( 600 * 4 ) 2400 6 Equipment No change form the previous year 3500 7 Interest Amortisation of interest will be 9000 9000 b Total Expenses 210680 c Total Net Income (a - b) 29320 Note : It has been assumed that the Cost of Goods will increase at the same rate of sales, since cost of goods sold is an variable expenditure it will increase if sales will increase. (Amounts in Dollars ) B Change in net income in percentage Amount a Net Income of the current year 18100 b Net Income of the next year 29320 c Increase in Net Income (b - a ) 11220 d Percentage of change in Net Income = Increase in Net Income / Net income of current year e Percentage of change in Net Income = 11220 / 18100 * 100 f Percentage of change in Net Income = 61.99 (Amounts in Dollars ) C Profit margin of current year Amount a Current year Sales = 200000 b Current year Net Income = 18100 c Profit margin = Current year income / Current year sales d Profit margin = 18100 / 200000 e Profit margin = 9.05% (Amounts in Dollars ) Profit margin of next year Amount a Next year Sales = 240000 b Next year Net Income = 18100 c Profit margin = Next year income / Next year sales d Profit margin = 29320 / 240000 e Profit margin = 12.22% (Amounts in Dollars ) D Calculation of Financing required Amount Percentage of expenses on current year sales a Current year Sales = 200000 b Current year total expenses = 181900 c Percentage of expenses on sales = Current year expenses / Current year sales d Percentage of expenses on sales = 181900/200000 e Percentage of expenses on sales = 90.95% (Amounts in Dollars ) Percentage of expenses on next year sales Amount a Next year Sales = 240000 b Next year total expenses = 210680 c Percentage of expenses on sales = Next year expenses / Next year sales d Percentage of expenses on sales = 210680/240000 e Percentage of expenses on sales = 87.78% Decision Since the percentage of expense of next year reduced form the current year to 3.17 % ( 90.95 % - 87.78 % ) additional financing is not required in the next year.
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