Top executive officers of Preston Company, a merchandising firm, are preparing t
ID: 2413661 • Letter: T
Question
Top executive officers of Preston 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 $1,900,000 1,330,000 Sales revenue Cost of goods sold Gross profit Selling & admin. expenses Net income 570,000 267 000 $ 303,000 Cost of goods sold is usually 70 percent of sales revenue, and selling and administrative expenses are usually 10 percent of sales plus a fred cost of $77.000 The president has announced that the company's goal is to increase net income by 20 percent Required The following items are independent of each other. a.1. Prepare a pro forma income statement. PRESTON COMPANY Pro Forma Income Statement Sales revenue Cost of goods sold Gross proft Selling & administrative expenses Net income a 2. What percentage increase in sales would enablo the company to reach ts goal? (Round your answer to 2 decimal places) upExplanation / Answer
a1. Additional calculations:
Net income of the current year = $303,000
Increase in net income required = 20%
Hence, desired net income of the next year = 303,000 x 120%
= $363,600
Let us assume that sales in the next year would be $X
Then, cost of goods sold would be = 70% of X
= 0.7X
Gross profit would be = X - 0.7X
= 0.30X
Selling and administrative expenses would be = 10% of sales + $77,000
= 0.1X + 77,000
Hence, net income would be = 0.30X - (0.1X + 77,000)
= 0.20X - 77,000
But, desired net income is = $363,600
Hence, 0.20X - 77,000 = 363,600
X = 440,600/0.2
= $2,203,000
Hence, desired sales in the next year = $2,203,000
Hence, cost of goods sold = 2,203,000 x 70%
= $1,542,100
Hence, selling and administrative expenses = (2,203,000 x 10% )+ 77,000
= $297,300
Preston Company
Proforma Income Statement
a2. Sales in current year = $1,900,000
Sales in next year = $2,203,000
Hence, increase in sales required = $2,203,000 - 1,900,000
= $303,000
Hence, percentage increase in sales required = 303,000/1,900,000
= 15.95%
Sales 2,203,000 Less: Cost of goods sold 1,542,100 Gross profit 660,900 Less: Selling and administrative expenses 297,300 Net income 363,600