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				$	3,580,000
Cost of sales:
Direct material	$	508,000
Direct labor		290,000
Variable overhead		279,000
Fixed overhead		640,000			1,717,000
Gross profit				$	1,863,000
Selling and General & Admin. Exp.
Variable		758,000
Fixed		258,000			1,016,000
Operating income				$	847,000

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 $49,000 increase in fixed costs.
The operating profit for next year would be:

Answer 1

Fixed costs in the next year = Fixed overhead + Fixed Selling and General & Admin. Exp + Increase in fixed costs

= 640,000 + 258,000 + 49,000

= $947,000

Sales (3,580,000 x 95%)				$	3,401,000
Cost of sales:
Direct material (508,000 x 110%)	$	558,800
Direct labor (290,000 x 110%)		319,000
Variable overhead (279,000 x 110%)		306,900
Variable Selling and General & Admin. Exp (758,000 x 110%)		833,800
Fixed costs		947,000			2,965,500
Operating income				$	435,500

The operating profit for next year would be: $435,500

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