Question

Top executive officers of Thornton Company, a merchandising firm, are preparing the next year's budget. The controller has provided everyone with the current year's projected income statement. Current Year Sales revenue $1,800,000 1,260,000 540,000 254,000 Cost of goods sold Gross profit Selling & administrative expenses $ 286,000 Net income 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 $74,000. 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?

Answer 1

X for a AB н I J K Sales Revenue Cost Of Goods Sold Gross Profit Selling And Administrative Expenses Net Income current year $ 1,800,000 $ 1,260,000 $540,000 $ 254,000 $ 286,000 THORNTON COMPANY Pro Forma Income Statement Sales Revenue Cost Of Goods Sold Gross Profit Selling And Administrative Expenses Net Income required reduction in Selling And Administrative Expenses = $ 1,800,000 $ 1,247,400 $ 552,600 $ 223,700 $ 328,900 $ 30,300 let sales be x X-0.7x -0.1x - $74,000 = $286,000 * 1.15 0.2x = $402,900 x = $402,900 / 0.2 required sales = $2,014,500 required reduction in Selling And Administrative Expenses = $254,000 - $223,700 = $30,300 THORNTON COMPANY Pro Forma Income Statement Sales Revenue $ 2,014,500 Cost Of Goods Sold $ 1,410,150 Gross Profit $ 604,350 Selling And Administrative Expenses $ 275,450 Net Income $ 328,900 percentage increase 11.92% THORNTON COMPANY Pro Forma Income Statement Sales Revenue Cost Of Goods Sold Gross Profit Selling And Administrative Expenses Net Income will the company reach its goal $ 2,070,000 $ 1,449,000 $ 621,000 $ 342,000 $ 279,000 NO reason - because the net income is less than the desired net income of $328,900 percentage increase in sales = ($2,014,500 - $18,00,000) / $1,800,000 percentage increase in sales = 11.92%

for formulas and calculations, refer to the image below -

X for a A B D E | н т т к Sales Revenue Cost Of Goods Sold Gross Profit Selling And Administrative Expenses Net Income current year 1800000 1260000 540000 254000 286000 THORNTON COMPANY Pro Forma Income Statement Sales Revenue Cost Of Goods Sold Gross Profit Selling And Administrative Expenses Net Income required reduction in Selling And Administrative Expenses = 1800000 =1260000*0.99 H4-H5 =H6-H8 =286000*1.15 =D6-H7 let sales bex X-0.7x -0.1x - $74,000 = $286,000 * 1.15 0.2x = $402,900 x = $402,900 / 0.2 required sales = $2,014,500 required reduction in Selling And Administrative Expenses = $254,000 - $223,700 = $30,300 THORNTON COMPANY THORMON co, Pro Forma Income Statement Sales Revenue 2014500 Cost Of Goods Sold =D17*0.7 Gross Profit =D17-D18 Selling And Administrative Expenses =(D17*0.1)+74000 Net Income =D19-D20 percentage increase =D17-D3/D3 THORNTON COMPANY Pro Forma Income Statement Sales Revenue Cost Of Goods Sold Gross Profit Selling And Administrative Expenses Net Income will the company reach its goal =1800000*1.15 =H15*0.7 =H15-H16 342000 =H17-H18 NO reason - because the net income is less than the desired net income of $328,900 percentage increase in sales = ($2,014,500 - $18,00,000) / $1,800,000 percentage increase in sales = =(2014500-1800000)/1800000

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