Answered step by step
Verified Expert Solution
Link Copied!

Question

1 Approved Answer

roblem 14-21 Preparing pro forma income statements with different assumptions LO 14-6 Top executive officers of Campbell Company, a merchandising firm, are preparing the next

roblem 14-21 Preparing pro forma income statements with different assumptions LO 14-6

Top executive officers of Campbell 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 $ 2,100,000
Cost of goods sold 1,575,000
Gross profit 525,000
Selling & administrative expenses 289,000
Net income $ 236,000

Cost of goods sold is usually 75 percent of sales revenue, and selling and administrative expenses are usually 10 percent of sales plus a fixed cost of $79,000. The president has announced that the companys goal is to increase net income by 10 percent.

Required

The following items are independent of each other.

  1. Prepare a pro forma income statement. What percentage increase in sales would enable the company to reach its goal?

  2. 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. Prepare a pro forma income statement still assuming the President's goal to increase net income by 10 percent. Calculate the required reduction in selling & administrative expenses to achieve the budgeted net income.

  3. The company decides to escalate its advertising campaign to boost consumer recognition, which will increase selling and administrative expenses to $345,000. With the increased advertising, the company expects sales revenue to increase by 10 percent. Assume that cost of goods sold remains a constant proportion of sales. Prepare a pro forma income statement. Will the company reach its goal?

Step by Step Solution

There are 3 Steps involved in it

Step: 1

blur-text-image

Get Instant Access to Expert-Tailored Solutions

See step-by-step solutions with expert insights and AI powered tools for academic success

Step: 2

blur-text-image_2

Step: 3

blur-text-image_3

Ace Your Homework with AI

Get the answers you need in no time with our AI-driven, step-by-step assistance

Get Started

Recommended Textbook for

SAP Audit Black Book

Authors: Bhushan Jairamdas Mamtani

1st Edition

9351194086, 978-9351194088

More Books

Students also viewed these Accounting questions