Question

ro forma income statement The marketing department of Metroline Manufacturing estimates that its sales in

20202020

will be

$ 1.61$1.61

million. Interest expense is expected to remain unchanged at

$ 33 comma 000$33,000 ,

and the firm plans to pay

$ 70 comma 000$70,000

in cash dividends during

20202020.

Metroline Manufacturing's income statement for the year ended December 31,

20192019 ,

is given

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, 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,

20202020.

b. Use fixed and variable cost data to develop a pro forma income statement for the year ended December 31,

20202020.

c. Compare and contrast the statements developed in parts a. and b. Which statement probably provides the better estimate of

20202020

income? Explain why.

Metroline Manufacturing

Breakdown of Costs and Expenses

into Fixed and Variable Components

for the Year Ended December​ 31, 20192019

Cost of goods sold

     Fixed cost

$ 215 comma 000$215,000

     Variable cost

696 comma 000696,000

Total cost

Modifying $ 911 comma 000 with double underline      $911,000

Operating expenses

     Fixed expenses

$ 32 comma 000$32,000

     Variable expenses

88 comma 00088,000

Total expenses

Modifying $ 120 comma 000 with double underline      $120,000

Metroline Manufacturing

Income Statement

for the Year Ended December​ 31, 20192019

Sales revenue

$ 1 comma 403 comma 000$1,403,000

​Less: Cost of goods sold

911 comma 000911,000

Gross profits

$ 492 comma 000$492,000

​Less: Operating expenses

120 comma 000120,000

Operating profits

$ 372 comma 000$372,000

​Less: Interest expense

33 comma 00033,000

Net profits before taxes

$ 339 comma 000$339,000

​Less: Taxes

​(rate equals 40 %rate=40%​)

135 comma 600135,600

Net profits after taxes

$ 203 comma 400$203,400

​Less: Cash dividends

61 comma 00061,000

To retained earnings

Modifying $ 142 comma 400 with double underline       $142,400

Answer 1

Please note, Figures in blue color, represents absolute values and in black color represents formulas.

0 2019A 2020E 2019 2019A 2020E 2019 Percent of Sales method Variable Costing method 5 Income Statement 1,403,000 1,610,000 911000 1,045,410 100.00 55.88 Gross Profit Operating expenses Operating Profit Manufacturing Contribution Margin Manufacturing 120,000 137,705 44.12 1761 Cash Dividends Retained Earnin Cash Dividends Retained Earni

Here, i have converted figures of 2019 in terms of percentage of its sales. And these figures are used to estimate data in 2020.

In both methods, net output will be same. Only difference is in Gross margin. Accounting used in, first method is accepted by GAAP rules and second method helps managers in internal decision making by looking at variable and fixed expenses separately.

Good Luck!!