Text Exercises

Text Exercises

Text Exercise
Managerial Accounting/Acc 561
May 6, 2011

Text Exercise
Question 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. 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. 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.

Solution:
Let's construct a table representing the data for both years - 2006 and 2007:
|Year                                                                     |2006                       |2007                       |
|Net sales                                                                 |   68,222.00               |   75,044.20               |
|Costs of products sold                                                   | (33,125.00)               | (36,437.50)               |
|Selling, general, and administrative expense                             | (21,848.00)               | (21,848.00)               |
|Operating income                                                         |   13,249.00 (b)           |16,758.70 (a)             |

  The percentage increase in income:

  [pic]

The percentage increase in income differs from the percentage increase in sales because the expenses are somewhat fixed. Therefore, such a value does not change...