Top executive officers of Baird Company, a merchandising firm, are preparing the
ID: 2412150 • Letter: T
Question
Top executive officers of Baird 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
$
2,300,000
Cost of goods sold
1,725,000
Gross profit
575,000
Selling & administrative expenses
304,000
Net income
$
271,000
Cost of goods sold is usually 75 percent of sales revenue, and selling and administrative expenses are usually 10 percent of sales plus a fixed cost of $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.
Using Excel prepare a pro forma income statement. What percentage increase in sales would enable the company to reach its goal?
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 2 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.
The company decides to escalate its advertising campaign to boost consumer recognition, which will increase selling and administrative expenses to $347,000. 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?
Current Year
Sales revenue
$
2,300,000
Cost of goods sold
1,725,000
Gross profit
575,000
Selling & administrative expenses
304,000
Net income
$
271,000
Explanation / Answer
1)
Baird Company
Pro forma Income Statement
Present
Revised
Sales revenue
2300000
2571000
Cost Of goods sold
1725000
1928250
Gross profit
575000
642750
Selling and Administrative expenses
304000
331100
Net Income
271000
311650
This is Solved as follows
Let the value of sales be x
x-0.75x-0.10x-74000=271000+15%
x-0.75x-0.10x-74000=311650
0.25x-0.10x-74000=311650
0.15x-74000=311650
0.15x=385650
x=385650/0.15
x=2571000
% of Increase in sales( (2571000-2300000)/2300000)*100
11.78%
2)
Baird Company
Pro forma Income Statement
Present
Revised
Sales revenue
2300000
2300000
Cost Of goods sold
1725000
1690500
Gross profit
575000
609500
Selling and Administrative expenses
304000
297850
Net Income
271000
311650
Reduction in COGS
COGS actual
1725000
Reduction of 2%
34500
Net COGS
1690500
Net Reduction in Selling and Administrative Expenses
(A) Gross Profit
609500
(B) Required Net Profit
311650
(C=A-B) Maximum to be allowed as Selling and Dist Exp
297850
(D=304000-C) Net Decrease
6150
3)
Baird Company
Pro forma Income Statement
Present
Revised
Sales revenue
2300000
2645000
Cost Of goods sold
1725000
1983750
Gross profit
575000
661250
Selling and Administrative expenses
304000
347000
Net Income
271000
314250
Yes , Company will achieve its target income by increasing Advertisement expenses and sales revenue.
1)
Baird Company
Pro forma Income Statement
Present
Revised
Sales revenue
2300000
2571000
Cost Of goods sold
1725000
1928250
Gross profit
575000
642750
Selling and Administrative expenses
304000
331100
Net Income
271000
311650
Related Questions
drjack9650@gmail.com
Navigate
Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.