Exercise 14-15Preparing pro forma income statements with different assumptions

Daniel Singh, the controller of Meier Corporation, is trying to make 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.

Joe Meier, the chief executive officer, told Mr. Singh that he expected sales next year to be 8 percent for each respective quarter above last year's level. However, Ashley Odom, the vice president of sales, told Mr. Singh that she believed sales growth would be only 5 percent.

Required

a.Make a pro forma income statement including quarterly budgets for the coming year using Mr. Meier's estimate.

b.Make a pro forma income statement including quarterly budgets for the coming year using Ms. Odom's estimate.

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

CHECK FIGURE a. Nl: $315,000 c. Nl: $345,000 Problem 14-16Behavioral impact of budgeting Butler Corporation has three divisions, each operating as a responsibility center. To provide an incentive for divisional executive officers, the company gives divisional management a bonus equal to 15 percent of the excess of actual net income over budgeted net income. The following is French Division's current year's performance. The president has just received next year's budget proposal from the vice president in charge of French Division. The proposal budgets a 5 percent increase in sales revenue with an extensive explanation about stiff market competition. The president is puzzled. French has enjoyed revenue growth of around 10 percent for each of the past five years. The president had consistently approved the division's budget proposals based on 5 percent growth in the past. This time, the president wants to show that he is not a fool. \"I will impose a 15 percent revenue increase to teach them a lesson!\" the president says to himself smugly. Assume that cost of goods sold and selling and administrative expenses remain stable in proportion to sales. Required a.Prepare the budgeted income statement based on French Division's proposal of a 5 percent increase. b.If growth is actually 10 percent as usual, how much bonus would French Division's executive officers receive if the president had approved the division's proposal? c.Prepare the budgeted income statement based on the 15 percent increase the president imposed. d.If the actual results turn out to be a 10 percent increase as usual, how much bonus would French Division's executive officers receive since the president imposed a 15 percent increase? e.Propose a better budgeting procedure for Butler Corporation. Current Year Sales revenue Cost of goods sold Gross profit Selling & admin. expenses Net income 5% Revenue increase $2,000,000 1,250,000 750,000 450,000 $300,000 15% Revenue increase