Top executive officers of Leach Company, a merchandising firm, are perparing the next year's budgets. The controller has provded everyone with the current year's projected income statement.
Current Year
- Sales revenue $2,600,000
- Cost of goods sold 1,690,000
- Gross profit 910,000
- Selling & admin. expense 325,000
- Net income $ 585,000
Cost of goods sold is usually 65 percet of sales revenue and selling and administrative expenses are usually10 percent of sales plusa fixed cost of $65,000. he president has announced that the cmpany's gal is toincrease net income by 15 percent.
Required
a. What percentage increase in sales would enable the company to reach its goal? Support your answer with a pro forma income statement.
b. The market may become stagmant next year and the company does not expect an incease in sales. The production manger believes that an improved production procedure can cut cost of goods sold by 2 percent. What else can the company do to
reach its goals? Perpare a pro forma income statement illustrating your proposal.
c. The company decides to escalate its advertising campaign to boost consumer recognition. Which will increase selling and administrative expenses to $405,000. 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 can the company rach its goal?