Top executive officers of Leach Co., a merchandising firm, are preparing the nex
ID: 2443618 • Letter: T
Question
Top executive officers of Leach Co., 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 $2,600,000
Cost of goods sold 1,690,000
Gross profit 910,000
Selling & admin. expenses 325,000
Net income 585,000
Required
a. What percentage increase in sales would enable the company to reach its goal? Support your answer with a pro forma income statement.
b. The market many 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%. What else can the company do to reach its goal? Prepare a pro forma income statement illustrating your proposal.
c. The company decides to escalate its advertising campaign to boost consumer recognition, which will increase selling administrative expenses to $405,000. With the increased advertising, the company expects sales revenue to increase by 15%. Assume the cost of goods sold remains a constant proportion of sales. Can the company reach its goal?
Explanation / Answer
As my cramster-mate SanjayS pointed out that you have missing information in your question. I assume as follows and solve accordingly :
Cost of goods sold is usually 65% of sales revenue, and selling and administrative expenses are usually 10 % of sales plus a fixed cost of $65,000. The president has announced that the company's goal is to increase net income by 15 %.
a. What percentage increase in sales would enable the company to reach its goal? Support your answer with a pro forma income statement.
Current Net Income $585,000
Add: Desired increase 15% $87,750
Required Net Income $672,750
Total variable costs = 65% of sales + 10% of sales = 75% of Sales
Let Total Sales be X then,
X = 0.75X + $65,000(Fixed Selling & Administration costs) + $672,750
0.25X = $737,750
Total Sales = $2,951,000
Required percentage increase = ($2,951,000 - $2,600,000)/$2,600,000
=13.5%
Proforma Income Statement
Projected Year
Sales revenue $2,951,000
Cost of goods sold(65%) $1,918,150
Gross profit $1,032,850
Selling & admin. expenses $360,100
($2,951,000 x 10%) = $65,000
Net Income $672,750
b. The market many 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%. What else can the company do to reach its goal? Prepare a pro forma income statement illustrating your proposal.
Revised Variable costs = 75% - 2% = 73%
X = 0.73X + $65,000(Fixed Selling & Administration costs) + $672,750
0.27X = $737,750
Total Sales = $2,732,407
Proforma Income Statement
Projected Year
Sales revenue $2,732,407
Cost of goods sold(63%) $1,721,417
Gross profit $1,010,990
Selling & admin. expenses $338,240
($2,732,407 x 10%) = $65,000
Net Income $672,750
c. The company decides to escalate its advertising campaign to boost consumer recognition, which will increase selling administrative expenses to $405,000. With the increased advertising, the company expects sales revenue to increase by 15%. Assume the cost of goods sold remains a constant proportion of sales. Can the company reach its goal?
Proforma Income Statement
Projected Year
Sales revenue($2,600,000 x 1.15) $2,990,000
Cost of goods sold(65%) $1,943,500
Gross profit $1,046,500
Selling & admin. expenses $405,000
Net Income $641,500
Increase in Net Income = ($641,500 - $585,000) x $585,000 = 9.66%
The company can not reach it goal. The net increase in net income is only 9.66% against desired percentage increase of 15%.
Please take care to change the figures according to your missing figure.