P4–15 Pro forma income statement The marketing department of Metroline Manufacturing estimates that its sales in 2016 will be $1.5 million. Interest expense is expected to remain unchanged at $35,000, and the firm plans to pay $70,000 in cash dividends during 2016. Metroline Manufacturing’s income statement for the year ended December 31, 2015, and a breakdown of the firm’s cost of goods sold and operating expenses into their fixed and variable components are given below.

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.

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Metroline Manufacturing Income Statement for the Year Ended December 31, 2015 Sales revenue Less: Cost of goods sold Gross profits Less: Operating expenses Operating profits Less: Interest expense Net profits before taxes Less: Taxes (rate = 40%) Net profits after taxes Less: Cash dividends To retained earnings $1,400,000 910,000 $ 490,000 120,000 $ 370,000 35,000 $ 335,000 134,000 $ 201,000 66,000 $ 135,000 Metroline Manufacturing Breakdown of Costs and Expenses into Fixed and Variable Components for the Year Ended December 31, 2015 Cost of goods sold Fixed cost Variable cost Total costs Operating expenses Fixed expenses Variable expenses Total expenses $210,000 700,000 $910,000 $ 36,000 84,000 $120,000