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Unformatted text preview: WEEK 3 TEXT QUESTIONS 1 Week 3 Text Question Paula Wilson June 12, 2011 ACC/561 Wayne Moore University of Phoenix WEEK 3 TEXT QUESTIONS 2 2-48 CVP and Financial Statements for a Mega-Brand Company Procter & Gamble Company is a Cincinnati-based company that produces household products under brand names such as Gillette, Bounty, Crest, Folgers, and Tide. The company’s 2006 income statement showed the following (in millions): Net sales $68,222 Costs of products sold 33,125 Selling, general, and administrative expense 21,848 Operating income $13,249 Suppose that the cost of products sold is the only variable cost; selling, general, and administrative expenses are fixed with respect to sales. Percentage increase in income differs from percentage increase in sales because the fixed cost do not increases with increase in sales and hence the whole difference on incremental; sales – incremental cost of sales is added to operating income. SGA are normally mix (Selling might be pure variable - commission base; G&A normally fixed - office worker). Assume that Procter & Gamble had a 10% increase in sales in 2007 and that there was no change in costs except for increases associated with the higher volume of sales . A 10% increase on say sales will be 68222 *.10 = 6822.20. When we add this to original sales we will get the same number which we get by multiplying original sales by 1.1. Compute the predicted 2007 operating income for Procter & Gamble and its percentage increase. Explain why the percentage increase in income differs from the percentage increase in sales. The sales of the company on the assumptions you made would increase $6,822.2 to a total of $75,044.2. Since the Cost of Sales is the only variable impacted on changes in sales, it is the only cost to change. Cost of Sales is 48.5547% of sales. That means cost of sales on the increased sales is $36,437.50. This means net income is Net Sales $75,044.20 Cost of Sales 36,437.50 SG&A 21,848 Net Income $16,759 2-61 CVP in a Modern Manufacturing Environmen t A division of Hewlett-Packard Company...
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This note was uploaded on 06/25/2011 for the course ACCT 561 taught by Professor Jones during the Spring '10 term at University of Phoenix.
- Spring '10