Question

The marketing department of Metroline Manufacturing estimates that its sales in 2020 will be $1.54 million. Interest expense is expected to remain unchanged at $40,000​, and the firm plans to pay $69,000 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, 2012  
Sales revenue   $1,394,000
Less: Cost of goods sold   901,000
Gross profits   $493,000
Less: Operating expenses   121,000
Operating profits   $372,000
Less: Interest expense   40,000

BREAKDOWN OF COSTS AND EXPENSES   
Cost of goods sold  
Fixed cost   $217,000
Variable cost   684,000
Total cost   $901,000
Operating expenses  
Fixed expenses   $39,000
Variable expenses   82,000
Total expenses   $121,000
Net profits before taxes   $332,000
Less: Taxes (rate = 40%)   132,800
Net profits after taxes   $199,200
Less: Cash dividends   66,000
To retained earnings   $133,200

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