Top executive officers of Preston Company a merchandising fi

Top executive officers of Preston 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 $1,900,000 1,330,000 Sales revenue Cost of goods sold Gross profit Selling & admin. expenses Net income 570,000 267 000 $ 303,000 Cost of goods sold is usually 70 percent of sales revenue, and selling and administrative expenses are usually 10 percent of sales plus a fred cost of $77.000 The president has announced that the company\'s goal is to increase net income by 20 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 Cost of goods sold Gross proft Selling & administrative expenses Net income a 2. What percentage increase in sales would enablo the company to reach ts goal? (Round your answer to 2 decimal places) up

Solution

a1. Additional calculations:

Net income of the current year = $303,000

Increase in net income required = 20%

Hence, desired net income of the next year = 303,000 x 120%

= $363,600

Let us assume that sales in the next year would be $X

Then, cost of goods sold would be = 70% of X

= 0.7X

Gross profit would be = X - 0.7X

= 0.30X

Selling and administrative expenses would be = 10% of sales + $77,000

= 0.1X + 77,000

Hence, net income would be = 0.30X - (0.1X + 77,000)

= 0.20X - 77,000

But, desired net income is = $363,600

Hence, 0.20X - 77,000 = 363,600

X = 440,600/0.2

= $2,203,000

Hence, desired sales in the next year = $2,203,000

Hence, cost of goods sold = 2,203,000 x 70%

= $1,542,100

Hence, selling and administrative expenses = (2,203,000 x 10% )+ 77,000

= $297,300

Preston Company

Proforma Income Statement

a2. Sales in current year = $1,900,000

Sales in next year = $2,203,000

Hence, increase in sales required = $2,203,000 - 1,900,000

= $303,000

Hence, percentage increase in sales required = 303,000/1,900,000

= 15.95%

Sales	2,203,000
Less: Cost of goods sold	1,542,100
Gross profit	660,900
Less: Selling and administrative expenses	297,300
Net income	363,600