Question

The marketing department of Metroline Manufacturing estimates that its sales in

20202020

will be

$ 1.51$1.51

million. Interest expense is expected to remain unchanged at

$ 36 comma 000$36,000​,

and the firm plans to pay

$ 66 comma 000$66,000

in cash dividends during

20202020.

Metroline​ Manufacturing's income statement for the year ended December​ 31,

20192019​,

is given

Metroline Manufacturing Income Statement for the Year Ended December​ 31, 20192019 Copy to Clipboard + Open in Excel + Sales revenue $ 1 comma 405 comma 000$1,405,000 ​Less: Cost of goods sold 919 comma 000919,000 Gross profits $ 486 comma 000$486,000 ​Less: Operating expenses 126 comma 000126,000 Operating profits $ 360 comma 000$360,000 ​Less: Interest expense 36 comma 00036,000 Net profits before taxes $ 324 comma 000$324,000 ​Less: Taxes ​(rate equals 40 %rate=40%​) 129 comma 600129,600 Net profits after taxes $ 194 comma 400$194,400 ​Less: Cash dividends 62 comma 00062,000 To retained earnings Modifying $ 132 comma 400 with double underline       $132,400

Metroline Manufacturing Breakdown of Costs and Expenses into Fixed and Variable Components for the Year Ended December​ 31, 20192019 Copy to Clipboard + Open in Excel + Cost of goods sold      Fixed cost $ 214 comma 000$214,000      Variable cost 705 comma 000705,000 Total cost Modifying $ 919 comma 000 with double underline      $919,000 Operating expenses      Fixed expenses $ 37 comma 000$37,000      Variable expenses 89 comma 00089,000 Total expenses Modifying $ 126 comma 000 with double underline      $126,000

​,

along with a breakdown of the​ firm's cost of goods sold and operating expenses into their fixed and variable components.

a. Use the ​percent-of-sales method to prepare a pro forma income statement for the year ended December​ 31,

20202020.

b. Use fixed and variable cost data to develop a pro forma income statement for the year ended December​ 31,

20202020.

c. Compare and contrast the statements developed in parts a. and b. Which statement probably provides the better estimate of

20202020

​income? Explain why.

a. Use the ​percent-of-sales method to prepare a pro forma income statement for the year ended December​ 31,

20202020.

Complete the pro forma income statement for the year ended December​ 31,

20202020

​below:  ​(Round the percentage of sales to four decimal places and the pro forma income statement amounts to the nearest​ dollar.)

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Pro Forma Income Statement
Metroline Manufacturing, Inc.
for the Year Ended December 31, 2020
(percent-of-sales method)
Sales	$
Less: Cost of goods sold					%
Gross profits	$
Less: Operating expenses					%
Operating profits	$
Less: Interest expense
Net profits before taxes	$
Less: Taxes
Net profits after taxes	$
Less: Cash dividends
To retained earnings	$

Answer 1

a)

Metroline Manufacturing Income Statement for the year ended December 31, 2020
(Percent of Sales Method)
Particulars	Amount ($)	% of Sales
Sales	$              1,510,000.00
Less: Cost of Goods Sold	$                 981,500.00	65%
Gross Profit	$                 528,500.00
Less: Operating Expenses	$                 135,900.00	9%
Operating Profits	$                 392,600.00
Less: Interest Expense	$                    36,000.00
Net Profit before Taxes	$                 356,600.00
Less: Taxes @40%	$                 142,640.00
Net Profit after Taxes	$                 213,960.00
Less: Cash Dividends	$                    66,000.00
Retaining Earnings	$                 147,960.00

B)

Metroline Manufacturing Income Statement for the year ended December 31, 2020
(Based on Fixed Cost and Variable Cost Data)
Particulars	Amount ($)	Amount ($)	% of Sales
Sales		$          1,510,000.00
Less: Cost of Goods Sold
Fixed Cost	$ 214,000.00
Variable Cost	$ 755,000.00	$             969,000.00	50%
Gross Profit		$             541,000.00
Less: Operating Expenses		$                               -
Fixed Cost	$    37,000.00
Variable Cost	$    90,600.00	$             127,600.00	6%
Operating Profits		$             413,400.00
Less: Interest Expense		$                36,000.00
Net Profit before Taxes		$             377,400.00
Less: Taxes @40%		$             150,960.00
Net Profit after Taxes		$             226,440.00
Less: Cash Dividends		$                66,000.00
Retaining Earnings		$             160,440.00

C) The Proforma income statement developed using fixed and variable cost data projects a higher retaining earnings and higher tax where as percent to sales method projects a lower retaining earnings and lower tax.

Variable costs changes with the changes in the volume/sales where as fixed cost does not change with the changes in volume/sales up to a certain level of activity. Income statement based on fixed and variable cost data provides a better estimate since it estimates the cost based on the cost behavior rather than a mere percentage of sales.