acc407 procter amp gamble company is a cincinnati based company that produces househ 491734

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

a. Compute the predicted 2007 operating income for Procter & Gamble and its percentage increase.

b. Explain why the percentage increase in income differs from the percentage increase in sales.