Top executive officers of Vernon 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 $ 1,700,000 Cost of goods sold 1,190,000 Gross profit 510,000 Selling & administrative expenses 210,000 Net income $ 300,000 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 $40,000. 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: 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 $342,000. 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?
Master Budget
A master budget can be defined as an estimation of the revenue earned or expenses incurred over a specified period of time in the future and it is generally prepared on a periodic basis which can be either monthly, quarterly, half-yearly, or annually. It helps a business, an organization, or even an individual to manage the money effectively. A budget also helps in monitoring the performance of the people in the organization and helps in better decision-making.
Sales Budget and Selling
A budget is a financial plan designed by an undertaking for a definite period in future which acts as a major contributor towards enhancing the financial success of the business undertaking. The budget generally takes into account both current and future income and expenses.
Top executive officers of Vernon Company, a merchandising firm, are preparing the next year’s budget. The controller has provided everyone with the current year’s
| Current Year | |||
| Sales revenue | $ | 1,700,000 | |
| Cost of goods sold | 1,190,000 | ||
| Gross profit | 510,000 | ||
| Selling & administrative expenses | 210,000 | ||
| Net income | $ | 300,000 | |
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 $40,000. 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:
-
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 $342,000. 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?
Trending now
This is a popular solution!
Step by step
Solved in 4 steps
