Problem 7-20A Preparing pro forma income statements with different assumptions LO 7-6 Top executive officers of Rundle Company, a merchandising firm, are preparing the next year's budget. The controller has provided everyone with the current year's projected income statement. Cost of goods sold Gross profit Selling& $1,900,000 1.425,000 475,000 267,000 $ 208,000 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 $77000. The president has announced that the company's goal is to increase net income by 10 percent. Required The following items are independent of each other a. Prepare a pro forma income statement. What percentage increase in sales would enable the company to reach its goal? 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 sobi by 2 percent. Prepare a pro forma income statement still assuming the President's goal to increase net income by 10 percent. Calculate the required reduction in selling & administrative expenses to achieve the budgeted net income. c. The company decides to escalate its advertising campaign to boost consumer recognition, which will increase selling and administrative expenses to $342,000. With the increased advertising, the company expects sales revenue to increase by 10 percent. Assume that cost of goods sold remains a constant proportion of sales. Prepare a pro forma income statement. Wil the company reach its goal? 8 Problem 7-20A Preparing pro forma income statements with different assumptions LO 7-6 Top executive officers of Rundle Company, a merchandising firm, are preparing the next year's budget. The controller has provided everyone with the current year's projected income statement. Cost of goods sold Gross profit Selling& $1,900,000 1.425,000 475,000 267,000 $ 208,000 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 $77000. The president has announced that the company's goal is to increase net income by 10 percent. Required The following items are independent of each other a. Prepare a pro forma income statement. What percentage increase in sales would enable the company to reach its goal? 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 sobi by 2 percent. Prepare a pro forma income statement still assuming the President's goal to increase net income by 10 percent. Calculate the required reduction in selling & administrative expenses to achieve the budgeted net income. c. The company decides to escalate its advertising campaign to boost consumer recognition, which will increase selling and administrative expenses to $342,000. With the increased advertising, the company expects sales revenue to increase by 10 percent. Assume that cost of goods sold remains a constant proportion of sales. Prepare a pro forma income statement. Wil the company reach its goal? 8