Question

This project is about preparing a pro forma income statement for a newly opened private bookstore. This bookstore expects sales of $1,500,000 in the first year (2017), with an increase (randomly determined) up to the range of 17.5%~18.5% in year 2, 18.0%~20.0% in year 3, and slowing down to the range of 15.0%~17.5% and 14.5%~16.0% in years 4 and 5 respectively.

The usual product mix in a collegiate bookstore is textbooks, software, non-book supplies (such as clothing, pens, notebooks, etc.), and general books (such as fiction, classics, reference, cookbooks, etc.). Such a product mix is usually necessary for offsetting both the low margins allowed for texts and the expenses of doing business. The Profit Margin Ratio (PMR) for each product is: Profit of the product divided by the Sales of the product. In addition, this bookstore estimates the following percentages of sales for various expenses:

               Expense                                                             Percent of Sales

               Salary & benefits                                                      26.0%

               Advertising                                                                  3.5%

               General, selling, & administration                             4.8%

               Miscellaneous expenses                                              2.1%

The Rent & Utility expense is $40,000 for the first year (2017), and grows at a different rate for each year as determined by the following formula: 6.5% + 0.2%*(number of years away from the base year)^1/2. Taxes are paid only when the Earnings Before Taxes is non-negative.

Using Exhibit 1 (please do NOT change any item's cell address) to prepare five-year pro forma income statements.

ASSIGNMENTS: (Make sure that worksheet data, B22~E39, are formatted as currency with no decimals. The rest of the worksheet assumptions are formatted as percent with one decimal.)

  Decide a set of profit margin ratios (only percentages of the format xx.0%, are allowed) so that the predicted NET PROFIT AFTER TAXES for year 2019 is as large as possible within the range $130,000 and $135,000.

        Please note that for any two products, the higher profit margin ratio cannot be more than one and half times as much as the lower profit margin ratio.

Print the worksheet output with row numbers and column heading

Based on the identified profit margin ratios from the previous task, seek for another set of product mix ratios (i.e., the percentage combination for Text, Software, Non-Book, and General items) so that the predicted NET PROFIT AFTER TAXES for year 2020 is as large as possible within the range $120,000 and $130,000. (Constraints for 2019 do not apply here.)

        Each component in a product mix must be at least 10% but no more than 45.0%, and the percentage for the text book must be at least two times of the smallest component. Also, only percentages of the format xx.0% are allowed. (Note that you might also need to re-identify a set of sales growth rates.)

        Print the worksheet output with row numbers and column headings.

  Replace C3’s content with a formula involving RAND(). Print the cell formulas for cells C3 to C39 with row numbers and column headings.

Pro Forma Assumptions

2018 2019 2020 2021

Sales Growth

	Product Mix Ratios	Profit Margin Ratios
Text
Software	28.0%
Non-book
General	25.0%
Expense Assumptions
Salary & Benefits	26.0%
Advertising	3.5%
Selling, Gen. & Adm.	4.8%
Misc.	2.1%
Tax Rate	35.0%
Base Year	2010
	INCOME STATEMENT
	2017	2018	2019		2020	2021
SALES
Text
Software
Non-book
General
Total Sales	1,500,000
Cost of Goods Sold
Gross Profit
OPERATING EXPENSES
Salary & Benefits
Rent & Utilities	40,000
Advertising
Selling, Gen. & Adm.
Misc.
Total Operating Exp.
Earnings Before Taxes

Answer 1