Chapter 7, Problem 20PSB

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 spread sheet:

Table (1)

Excel workings:

Table (2)

Compute the percentage of COGS for next year:

$\begin{array}{c}\%\text{of budgeted COGS}=\frac{\text{COGS}}{\text{Sales}}\times 100\\ =\frac{\$280,000}{\$400,000}\times 100\\ =70\%\end{array}$

Hence, the percentage of COGS for next year is 70%.

Compute the sales value:

Consider sales as X:

$\begin{array}{c}\text{Net income}=\text{Sales}-\text{COGS}-\text{S\&A expenses}\\ \$66,000=\text{X}-0.70\text{X}-\$39,000+0.10\text{X}\\ \$66,000+\$39,000=\text{X}-0.70\text{X}+0.10\text{X}\\ \$105,000=0.2\text{X}\\ \text{X}=\$525,000\end{array}$

Hence, sales are $525,000.

Compute the percentage of increase in sales:

$\begin{array}{c}\%\text{of}\text{increase in sales}=\frac{\text{Projected sales}-\text{Current sales}}{\text{Current sales}}\times 100\\ =\frac{\$525,000-\$400,000}{\$400,000}\times 100\\ =31.25\%\end{array}$

Hence, the percentage of increase in sales is 31.25%.

Prepare a pro forma income statement:

Table (3)

Table (4)

Hence, the net income is $66,000.

b)

To determine

Prepare the pro forma income statement and the other ideas to reach the Person C’s goal.

Given information:

Discount rate of 3% on COGS

Explanation of Solution

Compute the COGS:

Excel spread sheet:

Table (5)

Excel workings:

Table (6)

Hence, the COGS are $271,600.

Compute the selling and administration expenses:

Consider selling and administration expenses as X:

$\begin{array}{c}\text{Gross profit}-\text{S\&A expenses}=\text{Net income}\\ \$128,400-\text{X}=\$66,000\\ \$128,400-\$66,000=\text{X}\\ \text{X}=\$62,400\end{array}$

Hence, selling and administration expenses are $62,400.

Prepare a pro forma income statement:

Excel spreadsheet:

Table (7)

Excel workings:

Table (8)

Hence, the net income is $66,000.

The management cuts the selling and administrative expenses by the amount of $2,600 to reach the goals of Person C.

c)

To determine

Whether the company can reach the goal of Person C

Explanation of Solution

Compute projected sales:

$\begin{array}{c}\text{Projected sales}=\text{Current sales}\times 1\text{25\%}\\ =\$400,000\times \frac{\left(100+25\right)}{100}\\ =\$500,000\end{array}$

Hence, the projected sales are $500,000.

Compute the projected cost of goods sold:

$\begin{array}{c}\text{Projected cost of goods sold}=\text{Projected sales}\times \text{70\% }\\ =\text{\$500,000}\times \text{70\% }\\ =\text{\$350,000}\end{array}$

Hence, the projected cost of goods sold is $350,000.

Prepare a pro forma income statement:

Excel spreadsheet:

Table (9)

Excel workings:

Table (10)

Hence, the net income is $65,000.

The company cannot reach the goal as the desired profit more than the actual that is $66,000 is more than the $65,000.