Top executive officers of Zachary 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	$	1,800,000
Cost of goods sold		1,260,000
Gross profit		540,000
Selling & administrative expenses		255,000
Net income	$	285,000

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 $75,000. 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.

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 1 percent. Prepare a pro forma income statement still assuming the President's goal to increase net income by 15 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 $349,000. 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. Will the company reach its goal?

A.Prepare a pro forma income statement. What percentage increase in sales would enable the company to reach its goal? (Round "Percentage increase" to 2 decimal places. (i.e., .2345 should be entered as 23.45).)

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 1 percent. Prepare a pro forma income statement still assuming the President's goal to increase net income by 15 percent. Calculate the required reduction in selling & administrative expenses to achieve the budgeted net income.

C.The company decides to escalate its advertising campaign to boost consumer recognition, which will increase selling and administrative expenses to $349,000. 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. Will the company reach its goal?

Sales Revenue COGS Gross Profit Selling and adm exp. Net Income 1800000 1260000 540000 255000 285000