Using Industry Statistics To Project Net Income

Smith has been interested in music since he was old enough to sit at the piano. He literally grew up with music, and he used his talent to earn his way through college. Smith has grown tired of his job at a large music house in Atlanta and is seriously considering moving back to his hometown to open his own small music shop. In researching this venture, Smith notices that he must include a projected income statement in his loan application. Use the following statistics from Robert Morris Associates’ Annual Statement Studies to answer the following question(s).

Net sales 100.0 percent
Cost of sales 59.9 percent
Gross profit 40.1 percent
Operating expenses 31.2 percent
Net profit (before taxes) 8.9 percent

1. Suppose that a market survey indicates that Smith’s proposed business is likely to generate only $190,000 in sales. What net profit should Smith expect to earn?

2. Using Smith’s target income of $23,000, construct a pro forma income statement for Smith’s proposed music shop.