Pro forma income statement The marketing department of Metroline Manufacturing
estimates that its sales in 2016 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 2016. Metroline Manufacturing’s income statement for the year ended
December 31, 2015, and a breakdown of the firm’s cost of goods sold and operating
expenses into their fixed and variable components are given below.
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.

Metroline Manufacturing
Income Statement
for the Year Ended December 31, 2015

Sales revenue $1,400,000
Less: Cost of goods sold 910,000
Gross profits $ 490,000
Less: Operating expenses 120,000
Operating profits $ 370,000
Less: Interest expense 35,000
Net profits before taxes $ 335,000
Less: Taxes (rate = 40%) 134,000
Net profits after taxes $ 201,000
Less: Cash dividends 66,000
To retained earnings $ 135,000

Metroline Manufacturing
Breakdown of Costs and Expenses
into Fixed and Variable Components
for the Year Ended December 31, 2015

Cost of goods sold
Fixed cost $210,000
Variable cost 700,000
Total costs $910,000
Operating expenses
Fixed expenses $ 36,000
Variable expenses 84,000
Total expenses $120,000