Question

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?

Answer 1

Sol:

Current sales = $6,000

Profit margin = 6.5%

Percentage increase in sale next year (r) = 4%

To determine pro forma net income:

As cost has direct relation to sales, it will grow in same proportion to sales. So as sales will increase cost will also increase in same proportion due to which the profit margin will remain the same.

Next year sales = Current sales x (1 + r)

Next year sales = 6000 x (1 + 4%)

Next year sales = 6000 x 1.04 = $6,240

Pro forma net income = Next year sales x Profit margin

Pro forma net income = 6,240 x 6.5%

Pro forma net income = 6,250 x 0.065 = $406.25

Therefore the pro forma net income will be $406.25