The marketing department of Metroline Manufacturing estimates that its sales in 2020 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 2020. Metroline Manufacturing’s income statement for the year ended December 31, 2019, 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, 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.

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Metroline Manufacturing Metroline Manufacturing Breakdown of Costs and Expenses into Fixed and Variable Components for the Year Ended December 31, 2019 Income Statement for the Year Ended December 31, 2019 Sales revenue $1,400,000 Cost of goods sold Less: Cost of goods sold Gross profits Less: Operating expenses 910,000 Fixed cost $210,000 $ 490,000 Variable cost 700,000 $910,000 120,000 Total costs $ 370,000 Operating profits Less: Interest expense Operating expenses 35,000 $ 36,000 Fixed expenses $ 335,000 Net profits before taxes Variable expenses 84,000 Less: Taxes (rate = 40%) 134,000 Total expenses $120,000 $ 201,000 Net profits after taxes Less: Cash dividends 66,000 To retained earnings $ 135,000