Chapter 4, Problem 4.16P

Learning Goal 5

P4-16 Pro forma income statement The marketing department of Metroline Manufacturing estimates that its sales in 2020 will be 51.5 million. Interest expense is expected to remain unchanged at $35,000, and the firm plans to pay $70,000 in cash dividends during 2020. Metroline Manufacturing’s income statement for the year ended December 31, 2019, and a breakdown of the firm’s cost of goods sold and operating expenses into their fixed and variable components are given below.

1. a. Use the percent-of-sales method to prepare a pro forma income statement for the year ended December 31, 2020.
2. b. Use fixed and variable cost data to develop a pro forma income statement for the year ended December 31, 2020.
3. 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, 2019

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, 2019

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