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.
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Metroline Manufacturing
Income Statement
for the Year Ended December 31, 2003
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Sales revenue
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$1,400,000
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Less: Cost of goods sold
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910,000
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Gross profits
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$490,000
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Less: Operating expenses
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120,000
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Operating profits
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$370,000
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Less: Interest expense
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35,000
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Net profits before taxes
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$335,000
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Less: Taxes (rate _ 40%)
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134,000
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Net profits after taxes
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$201,000
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Less: Cash dividends
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66,000
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To retained earnings
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$135,000
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Metroline Manufacturing
Breakdown of
Costs and Expenses
into Fixed and Variable
Components for the
Year Ended December 31, 2003
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Cost of goods sold
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Fixed cost
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$210,000
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Variable cost
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700,000
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Total cost
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$910,000
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Operating expenses
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Fixed expenses
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$36,000
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Variable expenses
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84,000
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Total expenses
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$120,000
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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.