Top executive officers of Preston Company, a merchandising firm, are preparing the next year’s budget. The controller has provided everyone with the current year’s projected income statement.
Sales revenue ............ $3,200,000
Cost of goods sold ........ 2,240,000
Gross profit ............ 960,000
Selling & admin. expenses ...... 380,000
Net income ............ $ 580,000
Cost of goods sold is usually 70 percent of sales revenue, and selling and administrative expenses are usually 10 percent of sales plus a fixed cost of $60,000. The president has announced that the company’s goal is to increase net income by 15 percent.
The following items are independent of each other.
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 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. 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 and administrative expenses to $460,000. 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. Can the company reach its goal?