Question

Assignment 2 P4-15

Pro forma income statement???The marketing department of Metroline Manufacturing estimates that its sales in 2016 will be $1.56 million. Interest expense is expected to remain unchanged at $33,000?, and the firm plans to pay $66,000 in cash dividends during 2016. Metroline? Manufacturing's income statement for the year ended December? 31, 2015, is given

Metroline Manufacturing breakdown

of Costs and Expenses into Fixed and

Variable Components for the Year Ending

December 31, 2015

Cost of goods sold  
Fixed cost   $214,000
Variable cost   694,000
Total cost   $908,000
Operating expenses  
Fixed expenses   $35,000
Variable expenses   84,000
Total expenses   $119,000

Metroline Manufacturing Income Statement

for the Year ending Decenver 31, 2015

Sales revenue   $1,403,000
Less: Cost of goods sold   908,000
Gross profits   $495,000
Less: Operating expenses   119,000
Operating profits   $376,000
Less: Interest expense   33,000
Net profits before taxes   $343,000
Less: Taxes (rate = 40%)   137,200
Net profits after taxes   $205,800
Less: Cash dividends   62,000
To retained earnings   $143,800

, 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, 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.

Answer 1

Variable costs percentage:
COGS	694000	1403000	0.494654
Operating expenses	84000	1403000	0.059872
a) Percent of sales method :
Income Statement for the year ended Dec 31, 2016:
	Amount $	Percent of Sales
Sales Revenu	1560000	100
Less: COGS	985661	63.2
Gross Profit	574339	36.8
Less: Operating Expenses	128400	8.2
Operating profits	445939	28.6
Less: Interest expense	33000	2.1
Net Profits before taxes	412939	26.5
Less: Taxes @ 40%	165176	10.6
Net Profits after taxes	247763	15.9
Less:Cash dividends	66000	4.2
To retained earnings	181763	11.7
b) Fixed and Variable cost method:
Income Statement for the year ended Dec 31, 2016:
		Amount $	%age
Sales Revenue		1560000
Less: Variable costs:
COGS	771661		0.494654
Operating expenses	93400		0.059872
total variable costs:		865061
Contribution		694939
Less: fixed costs:
COGS	214000
Operating expenses	35000
total fixed costs		249000
Operating profits		445939
Less: Interest expense		33000
Net Profits before taxes		412939
Less: Taxes @ 40%		165176
Net Profits after taxes		247764
Less:Cash dividends		66000
To retained earnings		181764
c)
Under the part a, the income statement is provided as Absorption method
and in percentage of sales whereas in part b, the income is defined through
the contribution method where for decision making we segregate the costs
under variable and fixed nature. Here we calculate the profit contribution of
organisation ability well over the variable costs.
For management to have decision on various parts, it will be suitable to have
Income statement under the Contribution method.