how does one prepare a pro forma income with different assumptions given the numbers for current year
sales revenue 2,000,000
Cost of goods sold 1,400,000
Gross profit 600,000
Selling & admin.expenses 260,000
Net income 340,000
Cost of goods sold is usually 70% of sale revenue and selling administrative expenses are usually 10% if sales plus fixed cost of $60,000.
What percentage increase in sales would enable the company to reach its goal? show your answer with pro forma income statement. Please show me how to go about and get the answer/ Thanks
To prepare a pro forma income statement with different assumptions, you need to analyze the given numbers and apply the provided assumptions. Here's how you can go about it:
1. Calculate the cost of goods sold (COGS) based on the assumption that it is usually 70% of sales revenue.
COGS = 70% * Sales Revenue = 70% * $2,000,000 = $1,400,000
2. Calculate the selling and administrative (S&A) expenses based on the assumption that they are usually 10% of sales plus a fixed cost of $60,000.
S&A Expenses = 10% * Sales Revenue + $60,000 = 10% * $2,000,000 + $60,000 = $200,000 + $60,000 = $260,000
3. Calculate the gross profit by subtracting the COGS from the sales revenue.
Gross Profit = Sales Revenue - COGS = $2,000,000 - $1,400,000 = $600,000
4. Calculate the net income by subtracting the S&A expenses from the gross profit.
Net Income = Gross Profit - S&A Expenses = $600,000 - $260,000 = $340,000
Now, to find the percentage increase in sales required to reach the goal, you can use the following steps:
5. Set up a formula to find the required increase in sales. Let the increased sales revenue be "X".
New Sales Revenue = Current Sales Revenue + X
6. Rewrite the formulas for COGS, S&A expenses, gross profit, and net income with the new sales revenue.
COGS = 70% * New Sales Revenue
S&A Expenses = 10% * New Sales Revenue + $60,000
Gross Profit = New Sales Revenue - COGS
Net Income = Gross Profit - S&A Expenses
7. Substitute the formulas into the net income equation and solve for "X" to find the required increase in sales.
Net Income = (New Sales Revenue - (70% * New Sales Revenue)) - (10% * New Sales Revenue + $60,000)
$340,000 = (New Sales Revenue - (0.7 * New Sales Revenue)) - (0.1 * New Sales Revenue + $60,000)
$340,000 = (0.3 * New Sales Revenue) - (0.1 * New Sales Revenue) - $60,000
$340,000 = 0.2 * New Sales Revenue - $60,000
$400,000 = 0.2 * New Sales Revenue
New Sales Revenue = $400,000 / 0.2 = $2,000,000
Therefore, the company would need a 100% increase in sales revenue ($2,000,000 - $2,000,000) to reach its goal.
To create the pro forma income statement, simply substitute the new sales revenue into the formulas and calculate the corresponding values for COGS, S&A expenses, gross profit, and net income.
Hope this helps! Let me know if you have any further questions.
To prepare a pro forma income statement with different assumptions, you need to follow these steps:
1. Determine the fixed costs: In this case, the fixed costs are given as $60,000.
2. Calculate the projected cost of goods sold (COGS): The COGS is usually 70% of sales revenue, so multiply the projected sales revenue by 70% to get the projected COGS.
Projected COGS = 70% * Projected Sales Revenue
3. Calculate the projected selling and administrative expenses: The selling and administrative expenses are usually 10% of sales plus the fixed costs. Therefore, multiply the projected sales revenue by 10% and add the fixed costs to get the projected selling and administrative expenses.
Projected Selling & Admin. Expenses = 10% * Projected Sales Revenue + Fixed Costs
4. Calculate the projected gross profit: Subtract the projected COGS from the projected sales revenue to get the projected gross profit.
Projected Gross Profit = Projected Sales Revenue - Projected COGS
5. Calculate the projected net income: Subtract the projected selling and administrative expenses from the projected gross profit to get the projected net income.
Projected Net Income = Projected Gross Profit - Projected Selling & Admin. Expenses
Now, to determine the percentage increase in sales that would enable the company to reach its goal, we need to solve for the projected sales revenue. Given that the current net income is $340,000, we can set up the equation as follows:
Projected Net Income = Projected Gross Profit - Projected Selling & Admin. Expenses
Projected Net Income = Projected Sales Revenue - Projected COGS - Projected Selling & Admin. Expenses
Rearranging the equation, we get:
Projected Sales Revenue = Projected Net Income + Projected COGS + Projected Selling & Admin. Expenses
Substituting the given values into the equation, we have:
Projected Sales Revenue = $340,000 + Projected COGS + Projected Selling & Admin. Expenses
Plug in the appropriate values for projected COGS and projected selling and administrative expenses, which were calculated in steps 2 and 3 respectively.
Projected Sales Revenue = $340,000 + (70% * Projected Sales Revenue) + (10% * Projected Sales Revenue + $60,000)
Now, you will need to solve this equation algebraically using appropriate methods. Rearrange the equation and isolate the variable 'Projected Sales Revenue' to one side.
For example, you can start by moving all the terms containing 'Projected Sales Revenue' to the left side of the equation:
Projected Sales Revenue - (70% * Projected Sales Revenue) - (10% * Projected Sales Revenue) = $340,000 + $60,000
Now, combine like terms:
Projected Sales Revenue * (1 - 70% - 10%) = $340,000 + $60,000
Continuing the simplification:
Projected Sales Revenue * (20%) = $400,000
Now, divide both sides of the equation by 20% to solve for Projected Sales Revenue:
Projected Sales Revenue = $400,000 / 20%
Projected Sales Revenue = $2,000,000
Therefore, a projected sales revenue of $2,000,000 would enable the company to reach its goal.
Using this projected sales revenue, you can now prepare the pro forma income statement by plugging in the values you have:
Projected Sales Revenue: $2,000,000
Projected COGS: 70% of $2,000,000
Projected Selling & Admin. Expenses: 10% of $2,000,000 ($200,000) + $60,000
Complete the pro forma income statement by subtracting the projected COGS and projected Selling & Administrative Expenses from the projected sales revenue to find the projected gross profit. Finally, subtract the projected selling and administrative expenses from the gross profit to find the projected net income.
Remember to double-check your calculations and ensure you handle any additional factors or assumptions that might be relevant to your specific situation.