Fresno Salads has current sales of $6,000 and a profit margin of 6.5 percent. The firm estimates that sales will increase by 4 percent next year and that all costs will vary in direct relationship to sales. What is the pro forma net income?

Question

Quizplus · Accepted Answer

1. Calculate the current net income:

Current net income = Sales * Profit margin
Current net income = $6,000 * 0.065
Current net income = $390

2. Calculate the next year's estimated sales:

Next year's estimated sales = Current sales * (1 + Sales growth rate)
Next year's estimated sales = $6,000 * (1 + 0.04)
Next year's estimated sales = $6,240

3. Calculate the pro forma net income:

Pro forma net income = (Sales - Variable costs) * Profit margin

Since all costs will vary in direct relationship to sales, we can calculate the variable costs as a percentage of sales:

Variable costs = Sales * Variable cost ratio

Variable cost ratio = 1 - Profit margin
Variable cost ratio = 1 - 0.065
Variable cost ratio = 0.935

Variable costs = $6,240 * 0.935
Variable costs = $5,827.20

Pro forma net income = ($6,240 - $5,827.20) * 0.065
Pro forma net income = $26.88

Therefore, the pro forma net income is $405.60.

Fresno Salads Has Current Sales of $6,000 and a Profit