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P3–15 Pro forma income statement

The marketing department of Metroline Manufacturing estimates that its sales in 2010 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 2010. Metroline Manufacturing’s income statement for the year ended December 31, 2009, is given below, along with a breakdown of the firm’s cost of goods sold and operating expenses into their fixed and variable components. Metroline Manufacturing Income Statement for the Year Ended December 31, 2009

Sales revenue $ 1,400,000.00
Less: Cost of goods sold $ 910,000.00
Gross profits $ 490,000.00
Less: Operating expenses $ 120,000.00
Operating profits $ 370,000.00
Less: Interest expense $ 35,000.00
Net profits before taxes $ 335,000.00
Less: Taxes (rate40%) $ 134,000.00
Net profits after taxes $ 201,000.00
Less: Cash dividends $ 66,000.00
To retained earnings $ 135,000.00

Metroline Manufacturing Breakdown of Costs and Expenses into Fixed and Variable Components for the Year Ended December 31, 2009

Cost of goods sold
Fixed cost $ 210,000.00
Variable cost $ 700,000.00
Total cost $ 910,000.00
Operating expenses
Fixed expenses $ 36,000.00
Variable expenses $ 84,000.00
Total expenses $ 120,000.00

a. Use the percent-of-sales method to prepare a pro forma income statement for the year ended December 31, 2010.
b. Use fixed and variable cost data to develop a pro forma income statement for the year ended December 31, 2010.
c. Compare and contrast the statements developed in parts a and b. Which statement probably provides the better estimate of 2010 income? Explain why.

P3–21 ETHICS PROBLEM

The SEC is trying to get companies to notify the investment
community more quickly when a “material change” will affect their forthcoming financial results. In what sense might a financial manager be seen as “more ethical” if he or she follows this directive and issues a press release indicating that sales will not be as high as previously anticipated?