Question

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 $39,000 , and the firm plans to pay

$71,000 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.

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.

Metroline Manufacturing Income Statement for the Year Ended December​ 31, 2019
Sales revenue	$1,391,000
Less: Cost of goods sold	908,000
Gross profits	$483,000
Less: Operating expenses	123,000
Operating profits	$360,000
Less: Interest expense	39,000
Net profits before taxes	$321,000
Less: Taxes ​(rate=40%​)	128,400
Net profits after taxes	$192,600
Less: Cash dividends	61,000
To retained earnings	$131,600

Metroline Manufacturing Breakdown of Costs and Expenses into Fixed and Variable Components for the Year Ended December​ 31, 2019
Cost of goods sold
Fixed cost	$216,000
Variable cost	692,000
Total cost	$908,000
Operating expenses
Fixed expenses	$30,000
Variable expenses	93,000
Total expenses	$123,000

Answer 1

a.

b.

c. Option B shares good insights into the performance of the company as it divides each expense into fixed and variable cost.