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CVP analysis

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.

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Solution Preview

We make the income statement for 2007
Sales (68,222X1.1) = 75,044 ( Sales increase by 10%)
Cost of Products sold (33,125X1.1) = 36,438 (cost of products sold is a variable cost and so ...

Solution Summary

The solution explains how calculate the operating income given a change in sales using CVP concepts