Top executive officers of Baird Company a merchandising firm

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

Current Year

Sales revenue

$

2,300,000

Cost of goods sold

1,725,000

Gross profit

575,000

Selling & administrative expenses

304,000

Net income

$

271,000

  
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 $74,000. The president has announced that the company’s goal is to increase net income by 15 percent.

Required

The following items are independent of each other.

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

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

The company decides to escalate its advertising campaign to boost consumer recognition, which will increase selling and administrative expenses to $347,000. 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?

	Current Year
Sales revenue	$	2,300,000
Cost of goods sold		1,725,000
Gross profit		575,000
Selling & administrative expenses		304,000
Net income	$	271,000

Solution

1)

Baird Company

Pro forma Income Statement

Present

Revised

Sales revenue

2300000

2571000

Cost Of goods sold

1725000

1928250

Gross profit

575000

642750

Selling and Administrative expenses

304000

331100

Net Income

271000

311650

This is Solved as follows

Let the value of sales be x

x-0.75x-0.10x-74000=271000+15%

x-0.75x-0.10x-74000=311650

0.25x-0.10x-74000=311650

0.15x-74000=311650

0.15x=385650

x=385650/0.15

x=2571000

% of Increase in sales( (2571000-2300000)/2300000)*100

11.78%

2)

Baird Company

Pro forma Income Statement

Present

Revised

Sales revenue

2300000

2300000

Cost Of goods sold

1725000

1690500

Gross profit

575000

609500

Selling and Administrative expenses

304000

297850

Net Income

271000

311650

Reduction in COGS

COGS actual

1725000

Reduction of 2%

34500

Net COGS

1690500

Net Reduction in Selling and Administrative Expenses

(A) Gross Profit

609500

(B) Required Net Profit

311650

(C=A-B) Maximum to be allowed as Selling and Dist Exp

297850

(D=304000-C) Net Decrease

6150

3)

Baird Company

Pro forma Income Statement

Present

Revised

Sales revenue

2300000

2645000

Cost Of goods sold

1725000

1983750

Gross profit

575000

661250

Selling and Administrative expenses

304000

347000

Net Income

271000

314250

Yes , Company will achieve its target income by increasing Advertisement expenses and sales revenue.

1)	Baird Company
	Pro forma Income Statement
		Present	Revised
	Sales revenue	2300000	2571000
	Cost Of goods sold	1725000	1928250
	Gross profit	575000	642750
	Selling and Administrative expenses	304000	331100
	Net Income	271000	311650