Top executive officers of Vernon 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 | $ | 2,400,000 | |
| Cost of goods sold | | 1,680,000 | |
| Gross profit | | 720,000 | |
| Selling & administrative expenses | | 317,000 | |
| Net income | $ | 403,000 | |
|
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 $77,000. 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.
Prepare a pro forma income statement. What percentage increasein sales would enable the company to reach its goal?
The market may become stagnant next year, and the company doesnot expect an increase in sales revenue. The production managerbelieves that an improved production procedure can cut cost ofgoods sold by 1 percent. Prepare a pro forma income statement stillassuming the President's goal to increase net income by 15 percent.Calculate the required reduction in selling & administrativeexpenses to achieve the budgeted net income.
The company decides to escalate its advertising campaign toboost consumer recognition, which will increase selling andadministrative expenses to $341,000. 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?
