Silver's Jewelers has current sales of $138,900 and a proﬁt margin of 8 percent. The ﬁrm estimates that sales will increase by 4% next year and that all costs will vary in direct proportion to sales. What
Is the pro forma net income?

Question

Quizplus · Accepted Answer

To find the pro forma net income, we need to first calculate the projected sales for next year:

Projected Sales = Current Sales x (1 + Sales Growth Rate)
Projected Sales = $138,900 x (1 + 0.04)
Projected Sales = $144,336

Since all costs vary in direct proportion to sales, the cost of goods sold (COGS) and operating expenses (OE) will both be 104% of their current values:

Projected COGS = Current COGS x (Projected Sales / Current Sales)
Projected COGS = ($138,900 x 0.92) x (144,336 / 138,900)
Projected COGS = $117,276.24

Projected OE = Current OE x (Projected Sales / Current Sales)
Projected OE = ($138,900 x 0.92) x (144,336 / 138,900)
Projected OE = $21,279.24

Now we can calculate the projected net income:

Projected Sales - Projected COGS - Projected OE = Projected Net Income
$144,336 - $117,276.24 - $21,279.24 = $5,780.52

However, we need to remember that the profit margin of 8 percent is based on current sales, not projected sales. Therefore, to get the pro forma net income, we need to adjust our calculation by multiplying the projected net income by the ratio of the current profit margin to 100%:

Pro Forma Net Income = Projected Net Income x (Current Profit Margin / 100%)
Pro Forma Net Income = $5,780.52 x (8 / 100)
Pro Forma Net Income = $462.44

Finally, we can add the pro forma net income to the current net income to get the total projected net income:

Total Projected Net Income = Current Net Income + Pro Forma Net Income
Total Projected Net Income = $11,094.04 + $462.44
Total Projected Net Income = $11,556.48

Therefore, the answer is D: $11,556.48

Silver's Jewelers Has Current Sales of $138,900 and a Proﬁt