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 Breakdown of Costs and Expenses into Fixed and Variable Components for the Year Ended December 31, 2015 Sales revenue $1,400,000

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

Metroline Manufacturing Income Statement for the Year Ended December 31, 2015 Sales revenue $1,400,000

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