Reference no: EM13554719

Pro forma income statement The marketing department of Metro line Manufacturing estimates that its sales in 2004 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 2004. Metro line Manufacturing's income statement for the year ended December 31, 2003, is given below, along with a breakdown of the firm's cost of goods sold and operating expenses into their fixed and variable components.

Metroline Manufacturing Income Statement for the Year Ended December 31, 2003
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, 2003
Cost of goods sold
Fixed cost	$210,000
Variable cost	700,000
Total cost	$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, 2004.

b. Use fixed and variable cost data to develop a pro forma income statement for the year ended December 31, 2004.

c. Compare and contrast the statements developed in parts a and b. Which statement probably provides the better estimate of 2004 income? Explain why.