Top executive officers of Baird Company, a merchandising firm, are preparing the

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

Part 1

Proforma Income Statement

Net Income With 15% = ($271000+15%) = $311650

Cobtribution Margin = Sales - Variable cost

Contribution Margin = 100% - (75%+10%) = 15%

Sales required to achieve $311650 = (Profit + Fixed cost)/Contribution Margin

Sales = ($311650+$74000)/15% = $2571000

Proforma Income Statement

Part 2

Proforma Income Statement

Required Reduction in selling and Administrative expenses = ($331100 - $309350) = $21750

Part 3

Particulars Amount Sales $2300000 Less - Cost of Goods Sold (75%) $1725000 Gross Profit $575000 Selling and Administrative Expenses $304000 Net Income $271000

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