From: Principles of Managerial Finance (14 ed)

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 Manufacturings income statement for the year ended December 31, 2015, and a breakdown of the firms 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.

Metroline Manufacturing Income Statement for the Year Ended December 31, 2015

Sales revenue $1,400,000 Less: Cost of goods sold 910,000 Gross profits $ 490,000 Less: Operating expenses 120,000 Operating profits $ 370,000 Less: Interest expense 35,000 Net profits before taxes $ 335,000 Less: Taxes (rate = 40%) 134,000 Net profits after taxes $ 201,000 Less: Cash dividends 66,000 To retained earnings $ 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 $210,000 Variable cost 700,000 Total costs $910,000 Operating expenses Fixed expenses $ 36,000 Variable expenses 84,000 Total expenses $120,000