Question

Evergreen Corporation manufactures circuit boards and is in the process of preparing next year's budget. The pro forma income statement for the current year is presented below. Sales $ 3,500,000 Cost of sales: Direct Material $ 500,000 Direct labor 250,000 Variable Overhead 275,000 Fixed Overhead 600,000 1,625,000 Gross Profit $ 1,875,000 Selling and General & Admin. Exp. Variable 750,000 Fixed 250,000 1,000,000 Operating Income $ 875,000 For the coming year, the management of Evergreen Corporation anticipates a 5 percent decrease in sales, a 10 percent increase in all variable costs, and a $45,000 increase in fixed costs. The operating profit for next year would be:

Answer 1

Answer:

Operating Profit for next year will be $432,500

Explanation:

Particulars                      Current Year                      Next Year

Sales                                $3,500,000                      $3,500,000 X 95%

                                                                                    = $3,325,000

Less: Costs

Material                             $500,000                      $500,000 X 110%

                                                                                    = $550,000

Labor                                $250,000                      $250,000 X 110%

                                                                                    = $275,000

Overhead                          $275,000                      $275,000 X 110%

                                                                                    = $302,500

Fixed OH                           $600,000                      $600,000 + $45,000

                                                                                    = $645,000

Gross Profit                       $1,875,000                          $1,552,500

Less:

Selling & Administrative    $750,000                          $750,000 X 110%

                                                                                         = $825,000

Fixed Selling                      $250,000                         $250,000 + $45,000

                                                                                          = $295,000

Operating Income              $875,000                                 $432,500  

Operating Profit for next year will be $432,500