Question

Pro forma income statement  

The marketing department of Metroline Manufacturing estimates that its sales in 2020 will be $1.53 million. Interest expense is expected to remain unchanged at $ 36, 000 and the firm plans to pay $75,000 in cash dividends during 2020. Metroline​ Manufacturing's income statement for the year ended December​ 31, 2019​, is given. 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​ 31,2020.

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

2020.

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

2020.

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

2020

​income? Explain why.

​(Click on the icon located on the​ top-right corner of the data tables below in order to copy its contents into a​ spreadsheet.)

Metroline Manufacturing Income Statement for the Year Ended December​ 31, 20192019   Sales revenue $1,403,000 ​Less: Cost of goods sold 918,000 Gross profits $485,000 ​Less: Operating expenses 113,000 Operating profits $372,000 ​Less: Interest expense 36,000 Net profits before taxes $336,000 ​Less: Taxes ​(rate equals 40 %rate=40%​) 134,400 Net profits after taxes $201,600 ​Less: Cash dividends 61,000 To retained earnings $140,600

Metroline Manufacturing Breakdown of Costs and Expenses into Fixed and Variable Components for the Year Ended December​ 31, 20192019   Cost of goods sold   Fixed cost $219,000 Variable cost 699,000 Total cost $918,000 Operating expenses   Fixed expenses $37,000 Variable expenses 76,000 Total expenses $113,000

Answer 1

A) Income Statement Metroline Manufacturing, Inc.

for the Year Ended December 31, 2020(percent-of-sales method)

Sales	1530000
Less: cost of goods sold (65.4% of sales)	(1001079)
Gross profits	528921
Less: operating expenses (8.05% of sales)	(123165)
Operating profits	405756
Less: interest expense	(36000)
Net profits before taxes	369756
Less: taxes	(147902)
Net profits after taxes	221854
Less: dividend	(75000)
Retained earnings	146854

B)

   Income Statement

   Metroline Manufacturing,Inc.

   for the Year Ended December 31 ,2020(based on fixed and variable cost data)

Sales	1530000
Less: cost of goods sold
- fixed cost	(219000)
- variable cost	(762246)
Gross profits	548754
Less: operating expenses
- fixed expenses	(37000)
- variable expenses (5.41% of sales)	(82773)
Operating profits	428981
Less: interest expenses	(36000)
Net profits before taxes	392981
Less: taxes	(157192)
Net profits after taxes	235789
Less: dividend	(75000)
Retained earnings	160789

C)

The income statement developed using the fixed and variable cost data projects a higher net profit after taxes due to lower cost of goods sold and operating expenses.

Although the percent-of-sales method projects a more conservative estimate of net profit

after taxes, the income statement that classifies fixed and variable cost is more accurate.