Question

Top executive officers of Tildon 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 1,120,000 480,000 190,000 $ 290,000 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 $30.000. 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 2 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 $230.000. 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?

Answer 1

a.
Let the expected sales revenue be x
Net income	Sales revenue - Cost of goods sold - Selling & administrative expenses
(290000*1.15)	x - 0.70x - (0.10x+$30,000)
333500	0.30x - 0.10x-30,000
333500	0.20x - 30,000
0.20x	333500+30000
0.20x	363500
x	363500/0.20
x	$1,817,500
Thus, expected sales should be $1,817,500
% increase in sales	(1817500-1600000)/1600000
% increase in sales	13.59%
Thus, 13.59% increase in sales would enable company to reach its target
Proforma income statement
Pro forma income statement
Sales revenue	$1,817,500
Cost of goods sold	$1,272,250
Gross profit	$545,250
Selling & administrative expenses	$211,750
Net income	$333,500
Percentage increase	13.59%
b.
Calculate the required decrease in selling & administrative expense
Pro forma income statement
Sales revenue	$1,600,000
Cost of goods sold	$1,097,600	1120000*98%
Gross profit	$502,400
Selling & administrative expenses	$168,900	(502400-333500)
Net income	$333,500
Reduction in selling & administrative expense	$21,100	190000-168900
c.
Calculate the net income under new policy as shown below:
Pro forma income statement
Sales revenue	$1,840,000	(1600000*1.15)
Cost of goods sold	$1,288,000	1840000*70%
Gross profit	$552,000
Selling & administrative expenses	$420,000	(190000+230000)
Net income	$132,000
Will company reach its goal	No