Andy Collum, the controller of Grime Corporation, is trying to prepare a sales budget for the coming year. The income statements for the last four quarters follow.

Historically, cost of goods sold is about 60 percent of sales revenue. Selling and administrative expenses are about 10 percent of sales revenue.
Tim Grime, the chief executive officer, told Mr. Collum that he expected sales next year to be 10 percent above last year’s level. However, Sara Lund, the vice president of sales, told Mr. Collum that she believed sales growth would be only 5 percent.

Required

a. Prepare a pro forma income statement including quarterly budgets for the coming year using Mr. Grime’s estimate.

b. Prepare a pro forma income statement including quarterly budgets for the coming year using Ms. Lund’s estimate.

c. Explain why two executive officers in the same company could have different estimates of future growth.

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First Quarter Second Third Fourth Quarter Quarter Quarter Total Sales revenue $160,000 $180,000 $200,000 $260,000 $800,000 Cost of goods sold 96,000 108,000 120,000 156,000 480,000 Gross profit 64,000 72,000 80,000 104,000 320,000 Selling & admin. expense 16,000 18,000 20,000 26,000 80,000 Net income $ 48,000 $ 54,000 $ 60,000 $ 78,000 $240,000