Chapter 7, Problem 20PSA

a)

To determine

Determine the percentage increase in sales and prepare the pro forma income statement.

Explanation of Solution

The formula to calculate the percentage of increase in sales:

$\%\text{of}\text{increase in sales}=\frac{\text{COGS}}{\text{Current sales}}\times 100$

Compute net income:

Excel workings:

Table (1)

Excel spread sheet:

Table (2)

Compute the sales value:

Consider sales as X:

$\begin{array}{c}\text{Net income}=\text{Sales}-\text{COGS}-\text{S\&A expenses}\\ \$667,000=\text{X}-0.70\text{X}-\left(\$60,000+0.10\text{X}\right)\\ \$667,000+\$60,000=\text{X}-0.70\text{X}-0.10\text{X}\\ \$727,000=0.2\text{X}\\ \text{X}=\$3,635,000\end{array}$

Hence, sales are $3,635,000.

Compute selling and administration expenses:

$\begin{array}{c}\text{Selling and administration expenses}=\text{10\% of sales revenue}+\text{Fixed cost}\\ =\$3,635,000\times 0.10+\$60,000\\ =\$423,500\end{array}$

Hence, the selling and administration expenses are $423,500.

Prepare a pro forma income statement:

Excel workings:

Excel spreadsheet:

Table (3)

Hence, the net income is $667,000.

Compute the percentage of increase in sales:

$\begin{array}{c}\%\text{of}\text{increase in sales}=\frac{\text{Projected sales}-\text{Current sales}}{\text{Current sales}}\times 100\\ =\frac{\$3,635,000-\$3,200,000}{\$3,200,000}\times 100\\ =13.59\%\end{array}$

Hence, the percentage of increase in sales is 13.59%.

b)

To determine

Prepare the pro forma income statement and the other ideas to reach the Company P’s goal.

Given information:

Discount rate of 2% on COGS

Explanation of Solution

Compute the COGS:

Excel workings:

Table (4)

Excel spread sheet:

Table (5)

Hence, the COGS are $2,195,200.

Compute the selling and administration expenses:

Consider selling and administration expenses as X:

$\begin{array}{c}\text{Gross profit}-\text{S\&A expenses}=\text{Net income}\\ \left(\$1,004,800\right)-\text{X}=\$667,000\\ \left(\$1,004,800\right)-\$667,000=\text{X}\\ \text{X}=\$337,800\end{array}$

Hence, selling and administration expenses are $337,800.

Prepare a pro forma income statement:

Excel spreadsheet:

Table (6)

Hence, the net income is $667,000.

The management cuts the selling and administrative expenses by the amount of $42,200 that is $\left(\$380,000-\$337,800=\$42,200\right)$ to reach the goals of the President.

c)

To determine

Whether the company can reach the goal of Company P

Explanation of Solution

Compute projected sales:

$\begin{array}{c}\text{Projected sales}=\text{Current sales}\times 11\text{5\%}\\ =\$3,200,000\times \frac{\left(100+15\right)}{100}\\ =\$3,680,000\end{array}$

Hence, the projected sales are $3,680,000

Compute the projected cost of goods sold:

$\begin{array}{c}\text{Projected cost of goods sold}=\text{Projected sales}\times \text{70\% }\\ =\text{\$3,680,000}\times \text{70\% }\\ =\text{\$2,576,000}\end{array}$

Hence, the projected cost of goods sold is $2,576,000.

Prepare a pro forma income statement:

Excel spreadsheet:

Table (7)

Hence, the net income is $644,000.

The company cannot reach the goal as the desired profit is less than the actual that is $644,000 is less than the $667,000.