Question

Evergreen Corporation manufactures circuit boards and is in the process of preparing next year's budget. The pro forma income statement for the current year is presented below.

Sales				$	3,900,000
Cost of sales:
Direct material	$	540,000
Direct labor		450,000
Variable overhead		295,000
Fixed overhead		800,000			2,085,000
Gross profit				$	1,815,000
Selling and General & Admin. Exp.
Variable		790,000
Fixed		290,000			1,080,000
Operating income				$	735,000

For the coming year, the management of Evergreen Corporation anticipates a 5 percent decrease in sales, a 10 percent increase in all variable costs, and a $65,000 increase in fixed costs.
The operating profit for next year would be:

• $342,500

• $267,500.

• $282,500

• $621,250

Answer 1

Solution:

Budgeted Sales for next year = $3,900,000 * 95% = $3,705,000

Variable cost for next year = ($540,000 + $450,000 + $295,000 + $790,000)* 110% = $2,282,500

Fixed costs = ($800,000 + $290,000) + $65,000 = $1,155,000

Operating profit for next year = Sales - Variable costs - Fixed costs

= $3,705,000 - $2,282,500 - $1,155,000 = $267,500

Hence 2nd option is correct.