Question
Auto Tunes, Inc has been a wholesale distributor of automobile parts for domestic automakers for 20 years. The company has suffered through a recent slump
Auto Tunes, Inc has been a wholesale distributor of automobile parts for domestic automakers for 20 years. The company has suffered through a recent slump in the domestic auto industry, and its performance has not rebounded to the levels of the industry. Auto Tunes' income statements for the year ended December 31, 2019 is as follows:
AUTO TUNES, INC.
Income Statement
For the Year Ended December 31, 2019
(in thousands)
Net Sales | P 9,000 | ||
Less: Cost of Goods Sold | 6,000 | ||
Gross Profit | 3,000 | ||
Less: Operating Expenses | |||
Marketing | P 780 | ||
Administrative | 900 | 1,680 | |
Income before Interest and Taxes | 1,320 | ||
Less: Interest Expense | 140 | ||
Income before Income Tax | 1,280 | ||
Less: Income Tax | 512 | ||
Net Income | 768 |
Auto Tunes management team is considering the following actions for 2019, which they expect will improve profitability and collectively result in a 5% increase in unit sales:
a. Increase sales prices 10%
b. Increase advertising by Php 420,000 and hold all other marketing and administrative expenses at 2019 levels.
c. Improve customer service by increasing average current assets (inventory and accounts receivable) by a total of Php 300,000 and hold all other assets at 2019 levels.
d. Finance the additional assets at an annual interest rate of 10% and hold all other interest expense at 2019 levels.
e. Improve the quality of products carried, this will increase the unit cost of goods sold by 6%.
Auto Tunes effective income tax rate is expected to be 40%, the same as in 2019.
Required:
Budgeted income statement for Auto Tunes, Inc. for the year ending December 31, 2020 assuming that planned actions would be carried and that the 5% increase in unit sales would be realized.
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