The percentage sales method implies that if the historical cost of goods sold or total revenue has been increasing by a certain percentage, the same percentage is applied to forecasted sales levels ( Lin, 2019) . Similarly, the same concept should be applied to forecast the next year's budget for Tag-It Corporation. Based on the total revenues for the past four years, Tag-It Corporation reported a decrease in total revenue in year two by -5.8%. In the second year, the company reported an increase in total revenue of 8.4%, while in the third year, the company reported a decrease in total revenues of -4.6%. The company's total revenues for the past four years are used to forecast the next year's budget for Tag-It Corporation. Based on the trend, the company will report an increase in total revenues next year by 9.6%.
|
Tag-It Corporation Budget Report |
||
|
ACTUAL |
FORECAST |
|
|
Current Year |
Next Year |
|
| Total Revenue |
$ 71,879 |
$ 78,779.38 |
| Cost of Revenue |
$ (51,125) |
$ (56,033) |
| Gross profit |
$ 20,754 |
$ 22,746.38 |
| Operating Expenses | ||
| Selling, General and Admin |
$ (14,248) |
$ (15,615.81) |
| Research and development |
$ - |
$ - |
| Special income/ Other charges |
$ (2,194) |
$ (2,404.62) |
| Total Operating expenses |
$ (16,442) |
$ (18,020.43) |
| Operating Income |
$ 4,312 |
$ 4,725.95 |
| Net interest Income |
$ (666) |
$ (729.94) |
| Pre-tax income |
$ 3,646 |
$ 3,996.02 |
| Provision for income Tax (19.5%) |
$ (711) |
$ (779.22) |
| Net Income |
$ 2,935 |
$ 3,216.79 |
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Using the percentage of sales method, other particulars such as cost of sales, gross profit, expenses, corporation tax, and net income will increase with the same 9.6% in the next year. Therefore, Tag-It Corporation is not able to report an increase in sales in the next year with more than 9.6%.
Tag-It Corporation's ability to hit a 12% Increase in Sales
Based on revenue trends for the past four years, Tag-It Corporation is unable to increase its total sales by 12 % in the next year, as predicted by the CEO. But to achieve the CEO prediction, Tag-It Corporation should increase its business operations or use another method to assess its sales trend. Suppose Tag-It Corporation successful increase it sale by 12%; its budget will be as follows.
| 12% increase in sales | ||
|
Tag-It Corporation Budget Report |
||
|
ACTUAL |
FORECAST |
|
|
Current Year |
Next Year |
|
| Total Revenue |
$ 71,879 |
$ 80,504.48 |
| Cost of Revenue |
$ (51,125) |
$ (57,260) |
| Gross profit |
$ 20,754 |
$ 23,244.48 |
| Operating Expenses | ||
| Selling, General and Admin |
$ (14,248) |
$ (15,957.76) |
| Research and development |
$ - |
$ - |
| Special income/ Other charges |
$ (2,194) |
$ (2,457.28) |
| Total Operating expenses |
$ (16,442) |
$ (18,415.04) |
| Operating Income |
$ 4,312 |
$ 4,829.44 |
| Net interest Income |
$ (666) |
$ (745.92) |
| Pre-tax income |
$ 3,646 |
$ 4,083.52 |
| Provision for income Tax (19.5%) |
$ (711) |
$ (796.29) |
| Net Income |
$ 2,935 |
$ 3,287.23 |
References
Kim, Y., Choi, S., & Yi, M. Y. (2020). Applying comparable sales method to the automated estimation of real estate prices. Sustainability , 12 (14), 5679.
Lin, K. S. (2019, December). A New Percentage of Sales Method for Forecasting Additional Funds Needed. In 2019 International Conference on Machine Learning and Data Engineering (iCMLDE) (pp. 13-18). IEEE.
