The marketing department of Metroline Manufacturing estimates that its sales in 2020 will be $1.54 million. Interest expense is expected to remain unchanged at $40,000, and the firm plans to pay $69,000 in cash dividends during 2020.Metroline Manufacturing's income statement for the year ended December 31,2019, is given, along with a breakdown of the firm's cost of goods sold and operating expenses into their fixed and variable components.

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.

Metroline Manufacturing Income Statement for the Year Ended December 31, 2012 Sales revenue $1,394,000 Less: Cost of goods sold 901,000 Gross profits $493,000 Less: Operating expenses 121,000 Operating profits $372,000 Less: Interest expense 40,000

BREAKDOWN OF COSTS AND EXPENSES Cost of goods sold Fixed cost $217,000 Variable cost 684,000 Total cost $901,000 Operating expenses Fixed expenses $39,000 Variable expenses 82,000 Total expenses $121,000 Net profits before taxes $332,000 Less: Taxes (rate = 40%) 132,800 Net profits after taxes $199,200 Less: Cash dividends 66,000 To retained earnings $133,200

Pro Forma Income Statement

Metroline Manufacturing, Inc.

for the Year Ended December 31, 2020

(percent-of-sales method)

Sales $

Less: Cost of goods sold %

Gross profits $

Less: Operating expenses %

Operating profits $

Less: Interest expense

Net profits before taxes $

Less: Taxes

Net profits after taxes $

Less: Cash dividends

To retained earnings $