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31 August, 10:57

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:

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  1. 31 August, 11:15
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    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
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