Shane Corbett, a successful entrepreneur, is reviewing the results of his first year in business. His accountant delivered the following income statement just five minutes ago:
Current Year
Sales revenue.......................$400,000
Cost of goods sold..................280,000
Gross profit..........................120,000
Selling & admin. expenses..........65,000
Net income..........................$ 55,000
Mr. Corbett would like net income to increase 20 percent in the next year. This first year, selling and administrative expenses were 10 percent of sales revenue plus $39,000 of fixed expenses.
Required
The following questions are independent of each other.
a. Mr. Corbett expects that cost of goods sold and variable selling and administrative expenses will remain stable in proportion to sales next year. The fixed selling and administrative expenses will increase to $39,000. What percentage increase in sales would enable the company to reach Mr. Corbett's goal? Prepare a pro forma income statement to illustrate.
b. Market competition may become serious next year, and Mr. Corbett does not expect an increase in sales revenue. However, he has developed a good relationship with his supplier, who is willing to give him a volume discount that will decrease cost of goods sold by 3 percent. What else can the company do to reach Mr. Corbett's goal? Prepare a pro forma income statement illustrating your proposal.
c. If the company escalates its advertising campaign to boost consumer recognition, the selling and administrative expenses will increase to $85,000. With the increased advertising, the company expects sales revenue to increase by 25 percent. Assume that cost of goods sold remains constant in proportion to sales. Can the company reach Mr. Corbett's goal?