Principles of Managerial Finance

CHAPTER 3 Cash Flow and Financial Planning 135

LG5

a. Use the percent-of-sales methodto prepare a pro forma income statement for

the year ended December 31, 2004.

b. Use fixed and variable cost datato develop a pro forma income statement for

the year ended December 31, 2004.

c. Compare and contrast the statements developed in partsaandb.Which state-

ment probably provides the better estimate of 2004 income? Explain why.

3–15 Pro forma income statement—Sensitivity analysis Allen Products, Inc., wants

to do a sensitivity analysis for the coming year. The pessimistic prediction for

sales is $900,000; the most likely amount of sales is $1,125,000; and the opti-

mistic prediction is $1,280,000. Allen’s income statement for the most recent

year follows.

a. Use the percent-of-sales method,the income statement for December 31,

2003, and the sales revenue estimates to develop pessimistic, most likely, and

optimistic pro forma income statements for the coming year.

Allen Products, Inc.

Income Statement for the

Year Ended December 31, 2003

Sales revenue $937,500

Less: Cost of goods sold  (^4)  (^2)  (^1) , (^8)  (^7)  (^5) 
Gross profits $515,625
Less: Operating expenses  (^2)  (^3)  (^4) , (^3)  (^7)  (^5) 
Operating profits $281,250
Less: Interest expense  (^3)  (^0) , (^0)  (^0)  (^0) 
Net profits before taxes $251,250
Less: Taxes (rate25%)  (^6)  (^2) , (^8)  (^1)  (^3) 
Net profits after taxes $

1

8

8

,

4

3

7

Metroline Manufacturing
Breakdown of
Costs and Expenses
into Fixed and Variable
Components for the
Year Ended December 31, 2003
Cost of goods sold
Fixed cost $210,000
Variable cost  (^7)  (^0)  (^0) , (^0)  (^0)  (^0) 
Total cost $

9

1

0

,

0

0

0

Operating expenses
Fixed expenses $ 36,000
Variable expenses  (^8)  (^4) , (^0)  (^0)  (^0) 
Total expenses $

1

2

0

,

0

0

0

Metroline Manufacturing
Income Statement
for the Year Ended December 31, 2003
Sales revenue $1,400,000
Less: Cost of goods sold  (^9)  (^1)  (^0) , (^0)  (^0)  (^0) 
Gross profits $ 490,000
Less: Operating expenses  (^1)  (^2)  (^0) , (^0)  (^0)  (^0) 
Operating profits $ 370,000
Less: Interest expense  (^3)  (^5) , (^0)  (^0)  (^0) 
Net profits before taxes $ 335,000
Less: Taxes (rate40%)  (^1)  (^3)  (^4) , (^0)  (^0)  (^0) 
Net profits after taxes $ 201,000
Less: Cash dividends  (^6)  (^6) , (^0)  (^0)  (^0) 
To retained earnings $

1

3

5

,

0

0

0