Reference no: EM131060553

Bells manufacturing estimates that the sales for the 2016 financial year will be $2.25 million. No new borrowing was obtained and, therefore, the interest expense remained unchanged at $24,500. Bells Manufacturing is planning on paying cash dividends of $85,000 during 2016. Refer to the financial data in the table while answering the following

a. Compile the pro forma income statement for the year ended December 31, 2016, using the percentage of sales method.

b. Compile the pro forma income statement for the year ended December 31, 2016, using the fixed and variable cost data

c. As the financial manager, which of the two pro forma statements would you regard as more accurate, explain.

Bell Manufacturing

Income Statement for the Year

Ended December 31, 2015

Sales Revenue                                 $1,800,000

Less Cost of Goods sold                 $1,100,000

Gross Profits                                      $700,000

Less: Operating Expenses            $450,000

Operating Profits                             $250,000

Less: Interest Expense                  $24,500

Net Profits before taxes                               $225,500

Less: Taxes (rate = 40%)                                $90,200

Net Profit after taxes                     $135,300

Less: Cash Dividends                      $85,000

To retained earnings                      $50,300

Bell Manufacturing Breakdown

Of Cost and Expenses into Fixed

And Variable Components for the

Year Ended December 31, 2015

Cost of goods sold

                Fixed cost                            $750,000

                Variable cost                      $350,000

                Total Costs                          $1,100,000

Operating Expenses

                Fixed expenses                $155,000

                Variable expenses           $295,000

                Total Expense                    $450,000