Top executive officers of Tildon Company, a merchandising firm,are preparing the next year’s budget. The controller has providedeveryone with the current year’s projected income statement.
| Current Year |
| Sales revenue | $ | 1,600,000 | |
| Cost of goods sold | | 1,120,000 | |
| Gross profit | | 480,000 | |
| Selling & administrative expenses | | 190,000 | |
| Net income | $ | 290,000 | |
|
Cost of goods sold is usually 70 percent of sales revenue, andselling and administrative expenses are usually 10 percent of salesplus a fixed cost of $30,000. The president has announced that thecompany’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 percentageincrease in sales would enable the company to reach itsgoal?
B. The market may become stagnant next year, and thecompany does not expect an increase in sales revenue. Theproduction manager believes that an improved production procedurecan cut cost of goods sold by 2 percent. Prepare a pro forma incomestatement still assuming the President's goal to increase netincome by 15 percent. Calculate the required reduction in selling& administrative expenses to achieve the budgeted netincome.
C. The company decides to escalate its advertisingcampaign to boost consumer recognition, which will increase sellingand administrative expenses to $230,000. With the increasedadvertising, the company expects sales revenue to increase by 15percent. Assume that cost of goods sold remains a constantproportion of sales. Prepare a pro forma income statement. Will thecompany reach its goal?
