Question

Top executive officers of Vernon 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 Cost of goods sold Gross profit Selling & administrative expenses Net income Current Year $1,600,000 1,200,000 400,000 240,000 $ 160,000 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 $80,000. 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 1 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 $342,000. 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? Complete this question by entering vour answers in the tabs below.

Answer 1

(A) Current Sales Less: Cost of Goods sold Less: Variable Selling & admin expenses Contribution (B) Less: Fixed Selling expenses Net Income Contribution Margin % (A/B x100) $ 16,00,000.00 $ 12,00,000.00 $ 1,60,000.00 $ 2,40,000.00 $ 80,000.00 $ 1,60,000.00 15.00% Particulars Net Income ($160000 x 1.15) Fixed Selling Expenses Required Contribution (A) Contribution Margin% (B) Required Sales (A/B) Amount $ 1,84,000.00 $ 80,000.00 $ 2,64,000.00 15% $ 17,60,000.00 Solution 1. VERNON COMPANY Pro Forma Income Statement Sales Revenue $ 17,60,000.00 Cost Of Goods Sold (75% of Sales) $ 13,20,000.00 Gross Profit $ 4,40,000.00 Selling & Administrative expenses $ 2,56,000.00 ($80000 + 1760000) Net Income $ 1,84,000.00 Percentage Increase in Sales ($1760000 - 1600000)/$1600000 x 100 10.00%

Solution 2. Sales Revenue - No Increase Less: Cost of Goods ($1200000 x 99%) Less: Net Income - Required Selling and Admin Expenses $ 16,00,000.00 $ 11,88,000.00 $ 1,84,000.00 $ 2,28,000.00 $ 12,000.00 Reduction in Selling exp ($240000 - $228000) VERNON COMPANY Pro Forma Income Statement Sales Revenue $ 16,00,000.00 Cost Of Goods Sold (75% of Sales) $ 11,88,000.00 Gross Profit $ 4,12,000.00 Selling & Administrative expenses $ 2,28,000.00 ($80000 + 1760000) Net Income $ 1,84,000.00 Reduction in Selling exp ($240000 - $228000) $ 12,000.00

Solution 3. Expected Sales ($ 1600000 x115%) Cost of Goods Sold (75% of Sales) Gross Profit Selling Expenses Net Income $18,40,000.00 $ 13,80,000.00 $ 4,60,000.00 $ 3,42,000.00 $ 1,18,000.00 VERNON COMPANY Pro Forma Income Statement Sales Revenue($1600000 x 115%) $ 18,40,000.00 Cost Of Goods Sold (75% of Sales) $ 13,80,000.00 Gross Profit $ 4,60,000.00 Selling & Administrative expenses $ 3,42,000.00 Net Income $ 1,18,000.00 Will the Company Reach its Goal NO Company's Targeted Net Income was $184000, with increase in Selling and Admin expenses company will earn a net income of $118000

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