Info. list is correct. Needing b-2 & a-2.

Top executive officers of Preston Company, a merchandising firm, are preparing the next years budget. The controller has provided everyone with the current years projected income statement.

	Current Year
Sales revenue	$	3,200,000
Cost of goods sold		2,240,000
Gross profit		960,000
Selling & admin. expenses		380,000
Net income	$	580,000

Cost of goods sold is usually 70 percent of sales revenue, and selling and administrative expenses are usually 10 percent of sales plus a fixed cost of $60,000. The president has announced that the companys goal is to increase net income by 15 percent.

Required

The following items are independent of each other.

a-1.

Prepare a pro forma income statement.

PRESTON COMPANY
Pro Forma Income Statement
Sales revenue	$3,635,000
Cost of goods sold	2,544,500
Gross profit	1,090,500
Selling & administrative expenses	(423,500)
Net income	$667,000

a-2.

What percentage increase in sales would enable the company to reach its goal? (Round your answer to 2 decimal places.)

Incresease in sales

b.	The market may become stagnant next year, and the company does not expect an increase in sales revenue. The production manager believes that an improved production procedure can cut cost of goods sold by 2 percent.

b-1 Prepare a pro forma income statement still assuming the President's goal to increase net income by 15 percent.

PRESTON COMPANY
Pro Forma Income Statement
Sales revenue	$3,200,000
Cost of goods sold	2,195,200
Gross profit	1,004,800
Selling & administrative expenses	337,800
Net income	$667,000

b-2

Calculate the required reduction in selling & administrative expenses to achieve the budgeted net income.

Reduction in selling & adm. expenses

c-1.

The company decides to escalate its advertising campaign to boost consumer recognition, which will increase selling and administrative expenses to $460,000. With the increased advertising, the company expects sales revenue to increase by 15 percent. Assume that cost of goods sold remains a constant proportion of sales. Prepare a pro forma income statement.

PRESTON COMPANY
Pro Forma Income Statement
Sales revenue	$3,680,000
Cost of goods sold	2,576,000
Gross profit	1,104,000
Selling & administrative expenses	460,000
Net income	$644,000

c-2.

Will the company be able to reach its goal?

	Yes
	No