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

= \$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