Fin419 Principles of Managerial Finance: P4-15 The marketing department of Metroline Manufacturing

Fin419 Principles of Managerial Finance

P4–15 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 Manufacturing’s income statement for the year ended December 31, 2015, and a breakdown of the firm’s cost of goods sold and operating expenses into their fixed and variable components are given below.
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

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.
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