Top executive officers of Munoz Company, a merchandising firm, are preparing next year’s budget. The controller has provided the current year’s projected income statement.

**Current Year**
- Sales revenue: $1,800,000
- Cost of goods sold: $1,260,000
- Gross profit: $540,000
- Selling & administrative expenses: $215,000
- Net income: $325,000

Cost of goods sold is usually 70 percent of sales revenue, and selling and administrative expenses are usually 10 percent of sales plus a fixed cost of $35,000. The president has announced that the company’s goal is to increase net income by 15 percent.

**Required**

The following items are independent of each other:

1. Prepare a pro forma income statement. What percentage increase in sales would enable the company to reach its goal?

2. The market may become stagnant next year, and the company does not expect an increase in sales revenue. The production manager believes that an improved production procedure can cut the cost of goods sold by 2 percent. Prepare a pro forma income statement, still assuming the President's goal to increase net income by 15 percent. Calculate the required reduction in selling & administrative expenses to achieve the budgeted net income.

3. The company decides to escalate its advertising campaign to boost consumer recognition, which will increase selling and administrative expenses to $341,000. With the increased advertising, the company expects sales revenue to increase by 15 percent. Assume that cost of goods sold remains a constant proportion of sales. Prepare a pro forma income statement. Will the company reach its goal?

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### MUNOZ COMPANY
**Pro Forma Income Statement**
- Sales revenue:
- Cost of goods sold:
- Gross profit:
- Selling & administrative expenses:
- Net income: $0
- Percentage increase: %

For part 2:
- Reduction in selling & administrative expenses:

For part 3:
- Will the company reach its goal?