Problem:
The 2010 sales forecast for Clearwater Development Co. is $150 million. Interest expense will not change in the coming year. Use Clearwater's 2009 income statement ($ in thousands) presented below to answer the questions that follow:
Clearwater Development Co.
Income Statement
Sales $125,000
Less: Cost of goods sold 80,000
Gross profit $ 45,000
Less: Operating expenses 30,000
Less: Interest 10,000
Pretax profit $ 5,000
Less: Taxes (35%) 1,750
Net income $ 3,250
Q1. Use the percentage-of-sales method to construct a pro forma income statement for 2010.
Q2. You learn that 25 percent of the cost of goods sold and operating expense figures for 2009 are fixed costs that will not change in 2010. Reconstruct the pro forma income statement.
Q3. Compare and contrast the statement prepared in parts (a) and (b). Which statement will likely provide the better estimate of 2010 income? Explain.