Question

The marketing department of Metroline Manufacturing estimates that its sales in 2020 will be $ 1.51 million. Interest expense is expected to remain unchanged at $ 31,000​, and the firm plans to pay $ 65,000 in cash dividends during 2020. Metroline​ Manufacturing's income statement for the year ended December​ 31, 2019​, is given LOADING...​, 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, 2020. (cost of goods sold and operating expenses percent to 4 decimal places).

b. Use fixed and variable cost data to develop a pro forma income statement for the year ended December​ 31, 2020.

c. Compare and contrast the statements developed in parts a. and b. Which statement probably provides the better estimate of 2020 ​income? Explain why.?

Metroline Manufacturing

Income Statement

for the Year Ended December 31, 2019

Sales revenue $1,393,000

Less: Cost of goods sold 901,000

Gross profits $492,000

Less: Operating expenses 116,000

Operating profits $376,000

Less: Interest expense 31,000

Net profits before taxes $345,000

Less: Taxes (rate = 40%) 138,000

Net profits after taxes $207,000

Less: Cash dividends 69,000

To retained earnings $138,000

Metroline Manufacturing Breakdown of Cost and Expenses into fixed variable components for the year ended Decemeber 31,2019

Cost of goods sold

Fixed cost $210,000

Variable cost 691,000

Total cost $901,000

Operating expenses

Fixed expenses $38,000

Variable expenses 78,000

Total expenses $116,000

(please show how you solved)

Answer 1

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2 v 1 1 ENG 00:35 08-02-2020 33 X fix MG MH Mi Mi MK ML MM MN MO MP a MG487 MF 468 469 METROLINE 470 471 PERCENT OF SALES METHOD ENDED DEC 31, 2020 472 LESS 64.6805% 473 474 475 LESS 8.3274% LESS SALES REVENUE COGS GROSS PROFIT OPERATING EXPENSES OPERATING PROFITS INTEREST PROFIT BEFORE TAXES TAXES NET PROFIT AFTER TAXES CASH DIVIDENDS RETAINED EARNINGS 476 477 478 479 480 481 482 483 1393000 901000 492000 116000 376000 31000 345000 138000 207000 69000 138000 1510000 976676 [1510000 x 64.6805%] 533324 125744 (1510000 x 8.3274%] 407581 31000 376581 150632 225948 65000 160948 LESS LESS 484 485 486 487 b 488 489 490 491 ... CASH BUDGET budget 45 days cycle ROE, BV MV ratio VARIANCE BEP, OL FL ratios DETROIT float B-S profit loss SALES BUDGET dupont ... :

2 v 1 1 ENG 00:35 08-02-2020 33 X - MF fix MG MH Mi Mi MK ML MM MN MO MP a MG506 - 483 484 485 486 487 b 1393000 1510000 LESS 488 489 490 491 492 493 494 495 496 210000 691000 492000 49.6052% 210000 749039 [1510000 x 49.6052%] 550961 LESS SALES REVENUE COGS FIXED COSTS VARIABLE COSTS GROSS PROFIT OPERATING EXPENSES FIXED COSTS VARIABLE COSTS OPERATING PROFITS INTEREST PROFIT BEFORE TAXES TAXES NET PROFIT AFTER TAXES CASH DIVIDENDS RETAINED EARNINGS 5.5994% 497 LESS 498 499 38000 78000 376000 31000 345000 138000 207000 69000 138000 38000 84551 [1510000 x 5.5994%] 428411 31000 397411 158964 238446 65000 173446 LESS 500 501 LESS 502 503 504 505 506 roz ... CASH BUDGET budget 45 days cycle ROE, BV MV ratio VARIANCE BEP, OL FL ratios DETROIT float B-S profit loss SALES BUDGET dupont ... :

1 Ale $ w 2 v 1 1 ENG 00:35 08-02-2020 33 X MG321 - fi MG MF MH Mi Mi MK ML MM MN MO MP a 321 324 325 326 327 328 329 330C 331 332 333 334 THE PROFIT UNDER PERCENT OF SALES METHOD IS LOWER THE BASIC REASON BEHIND LOWER PROFIT IS THAT IT ASSUMES THAT WITH INCREASE IN SALES, COGS & OPERATING COST ALSO INCREASE IN SAME PROPORTION AS IT WAS IN LAST YEAR 336 337 338 BASICALLY, WE HAVE TO MAKE DIFFERENTIATION BETWEEN FIXED COST & VARIABLE COST FIXED COSTS DO NOT CHANGE VARIABLE COST CHANGES WITH SALES SO SECOND METHOD (b) IS BETTER 339 342 343 344 ... CASH BUDGET budget 45 days cycle ROE, BV MV ratio VARIANCE BEP, OL FL ratios DETROIT float B-S profit loss SALES BUDGET dupont ... :