Assignment 2 P4-15 Pro forma income statement???The marketing department of Metr
ID: 2617652 • Letter: A
Question
Assignment 2 P4-15
Pro forma income statement???The marketing department of Metroline Manufacturing estimates that its sales in 2016 will be $1.56 million. Interest expense is expected to remain unchanged at $33,000?, and the firm plans to pay $66,000 in cash dividends during 2016. Metroline? Manufacturing's income statement for the year ended December? 31, 2015, is given
Metroline Manufacturing breakdown
of Costs and Expenses into Fixed and
Variable Components for the Year Ending
December 31, 2015
Cost of goods sold
Fixed cost $214,000
Variable cost 694,000
Total cost $908,000
Operating expenses
Fixed expenses $35,000
Variable expenses 84,000
Total expenses $119,000
Metroline Manufacturing Income Statement
for the Year ending Decenver 31, 2015
Sales revenue $1,403,000
Less: Cost of goods sold 908,000
Gross profits $495,000
Less: Operating expenses 119,000
Operating profits $376,000
Less: Interest expense 33,000
Net profits before taxes $343,000
Less: Taxes (rate = 40%) 137,200
Net profits after taxes $205,800
Less: Cash dividends 62,000
To retained earnings $143,800
, 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, 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.
Explanation / Answer
Variable costs percentage: COGS 694000 1403000 0.494654 Operating expenses 84000 1403000 0.059872 a) Percent of sales method : Income Statement for the year ended Dec 31, 2016: Amount $ Percent of Sales Sales Revenu 1560000 100 Less: COGS 985661 63.2 Gross Profit 574339 36.8 Less: Operating Expenses 128400 8.2 Operating profits 445939 28.6 Less: Interest expense 33000 2.1 Net Profits before taxes 412939 26.5 Less: Taxes @ 40% 165176 10.6 Net Profits after taxes 247763 15.9 Less:Cash dividends 66000 4.2 To retained earnings 181763 11.7 b) Fixed and Variable cost method: Income Statement for the year ended Dec 31, 2016: Amount $ %age Sales Revenue 1560000 Less: Variable costs: COGS 771661 0.494654 Operating expenses 93400 0.059872 total variable costs: 865061 Contribution 694939 Less: fixed costs: COGS 214000 Operating expenses 35000 total fixed costs 249000 Operating profits 445939 Less: Interest expense 33000 Net Profits before taxes 412939 Less: Taxes @ 40% 165176 Net Profits after taxes 247764 Less:Cash dividends 66000 To retained earnings 181764 c) Under the part a, the income statement is provided as Absorption method and in percentage of sales whereas in part b, the income is defined through the contribution method where for decision making we segregate the costs under variable and fixed nature. Here we calculate the profit contribution of organisation ability well over the variable costs. For management to have decision on various parts, it will be suitable to have Income statement under the Contribution method.