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