Preparing Martin Manufacturing\'s 2013 pro forma financial statemets. to improve
ID: 2730588 • Letter: P
Question
Preparing Martin Manufacturing's 2013 pro forma financial statemets. to improve its competitive position, martin manufaturing is planning to implement a major equipment modernization program. Included will be replacement an modernization of key manufacturing equipment at a cost of $400,000 in 2013. the planned program is expected to lower the variable cost per unit of finished product. Terri Spiro, en experienced budget analyst has been charged with preparing a forecast of the firm's 2013 financial position, assumin replacement and modernization of manufacturing equiptment. she plans to use the 2012 financial stament alon with the key projected financial data.
A) use the historical and projected financial data provided to prepare a pro froma income statement for the year ended December 31,2013
Sales revenue = $6,500,000 100%
Less cost of goods sold=
Less operationg expenses
Selling expenses and general and administrative expense $ %
depreciation expene
total operating expenes
Operating profits
Less interest expenses
net profit before taxes
less taxes (40%)
total profit after taxes
Explanation / Answer
A pro froma income statement for the year ended December 31,2013
Sales
(-) Cost of goods sold (Note 1)
6500000
4904375
Gross profit
(-) Selling expense (Note 2)
(-) General and administrative expenses (Note 3)
(-) Depreciation
1595625
832000
416000
185000
Operating profits
(-) Interest
162625
97000
Net profit before tax
(-) Tax @ 40 %
65625
26250
(Note 1):- Inventory turnover ratio = 7 Times
Inventory turnover ratio = Cost of goods sold / Inventory
Assumimg there is no change in inventory for the year ending on December 31 , 2013.
7 = Cost of goods sold / 700625
Cost of goods sold = 7 * 700625 [ 700625 is the inventory figure for year 2012. Assuming this figure of 700625 is same in year 2013 with no change in inventories]
Cost of goods sold = $ 4904375
(NOTE 2):- Assuming Selling expenses are proportionate directly to sales. Thus, selling expenses for year 2013 calculated as follows:-
= 6500000 * 650000 / 5075000
= 6500000 * 0.128 (approx)
= $ 832000
(NOTE 3):- Assuming there is no change in general and administrative overhead for the year 2013. The geneal and administrative overhead for the year 2012 of $ 416000 remains same in year 2013.
Sales
(-) Cost of goods sold (Note 1)
6500000
4904375
Gross profit
(-) Selling expense (Note 2)
(-) General and administrative expenses (Note 3)
(-) Depreciation
1595625
832000
416000
185000
Operating profits
(-) Interest
162625
97000
Net profit before tax
(-) Tax @ 40 %
65625
26250
Total profit after tax 39375