Pro forma income statement The marketing department of Metroline Manufacturing e

Question

Pro forma income statement The marketing department of Metroline Manufacturing
estimates that its sales in 2016 will be $1.5 million. Interest expense is expected
to remain unchanged at $35,000, and the firm plans to pay $70,000 in cash dividends
during 2016. Metroline Manufacturing’s income statement for the year ended
December 31, 2015, and a breakdown of the firm’s cost of goods sold and operating
expenses into their fixed and variable components are given below.
a. Use the percent-of-sales method to prepare a pro forma income statement for the
year ended December 31, 2016.
b. Use fixed and variable cost data to develop a pro forma income statement for the
year ended December 31, 2016.
c. Compare and contrast the statements developed in parts a and b. Which statement
probably provides the better estimate of 2016 income? Explain why

Metroline Manufacturing
Breakdown of Costs and Expenses
into Fixed and Variable Components
for the Year Ended December 31, 2015   
Sales revenue $1,400,000

Cost of goods sold
Fixed cost $210,000
Variable cost 700,000
Total costs $910,000
Operating expenses
Fixed expenses $ 36,000
Variable expenses 84,000
Total expenses $120,000

Metroline Manufacturing Income Statement
for the Year Ended December 31, 2015
Sales revenue $1,400,000

Cost of goods sold 910,000

Gross profits $ 490,000

Less: Operating expenses 120,000
Operating profits $ 370,000
Less: Interest expense 35,000
Net profits before taxes $ 335,000
Less: Taxes (rate = 40%) 134,000
Net profits after taxes $ 201,000
Less: Cash dividends 66,000
To retained earnings $ 135,000

Explanation / Answer

Ans 3

Ans 1 Details % 2016 Sales Revenue 14,00,000.00 100% 15,00,000.00 Fixed cost            2,10,000.00 Variable cost            7,00,000.00 Total Cost of Goods Sold     9,10,000.00 65%     9,75,000.00 Gross Profit     4,90,000.00 35%     5,25,000.00 Operating Expenses Fixed expenses                36,000.00 Variable expenses                84,000.00 Total Operating expenses     1,20,000.00 9%     1,28,571.43 Operating Profits     3,70,000.00 26%     3,96,428.57 Less: Interest expense        35,000.00 3%        35,000.00 Net Profit Before tax     3,35,000.00 24%     3,61,428.57 Less Taxes     1,34,000.00 10%     1,44,571.43 Net Profit After Tax     2,01,000.00 14%     2,16,857.14 Less Cash Dividend        66,000.00 5%        70,000.00 To Retained earnigs     1,35,000.00 10%     1,46,857.14 Ans 2 Details 2015 2015 Variable cost as a % of sales 2016 2016 Sales Revenue 14,00,000.00     15,00,000.00 Fixed cost            2,10,000.00     2,10,000.00 Variable cost            7,00,000.00 50%     7,50,000.00 Total Cost of Goods Sold     9,10,000.00       9,60,000.00 Gross Profit     4,90,000.00       5,40,000.00 Operating Expenses Fixed expenses                36,000.00        36,000.00 Variable expenses                84,000.00 6%        90,000.00 Total Operating expenses     1,20,000.00                        -         1,26,000.00 Operating Profits     3,70,000.00                        -         4,14,000.00 Less: Interest expense        35,000.00           35,000.00 Net Profit Before tax     3,35,000.00       3,79,000.00 Less Taxes     1,34,000.00       1,51,600.00 Net Profit After Tax     2,01,000.00       2,27,400.00 Less Cash Dividend        66,000.00           70,000.00 To Retained earnigs     1,35,000.00       1,57,400.00

Ans 3

Details % of sales Method Fixed Vs Variable Method Sales 15,00,000.00 1500000 Cost Of Goods Sold     9,75,000.00            9,60,000.00 Gross Profit     5,25,000.00            5,40,000.00 Operating Expenses     1,28,571.43            1,26,000.00 Operating margin     3,96,428.57            4,14,000.00 Less Interest Expense        35,000.00               35,000.00 Profit before Tax     3,61,428.57            3,79,000.00 less Tax @ 40%     1,44,571.43            1,51,600.00 Profit After tax     2,16,857.14            2,27,400.00 Less Cash dividend        66,000.00               70,000.00 Retained Earnings     1,50,857.14            1,57,400.00

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