Bells manufacturing estimates that the sales for the 2016financial year will be $2.25 million.

No new borrowing was

obtainedand, therefore, the interest expense remained unchanged at $24,500.Bells Manufacturing is planning on
paying cash dividends of $85,000during 2016. Refer to the financial data in the table whileanswering the following
a. Compile the pro forma income statement for the year endedDecember 31, 2016, using the percentage of sales
method.
b. Compile the pro forma income statement for the year endedDecember 31, 2016, using the fixed and variable cost
data
c. As the financial manager, which of the two pro formastatements would you regard as more accurate, explain.
Bell Manufacturing
Income Statement for the Year
Ended December 31, 2015
Sales Revenue                               $1,800,000
Less Cost of Goods sold               $1,100,000
GrossProfits                                     $700,000
Less: OperatingExpenses           $450,000
OperatingProfits                            $250,000
Less: InterestExpense                 $24,500
Net Profits beforetaxes                              $225,500
Less: Taxes (rate =40%)                               $90,200
Net Profit aftertaxes                    $135,300
Less: CashDividends                     $85,000
To retainedearnings                     $50,300
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Bell Manufacturing Breakdown
Of Cost and Expenses into Fixed
And Variable Components for the
Year Ended December 31, 2015
Cost of goods sold
               Fixedcost                           $750,000
               Variablecost                     $350,000
               TotalCosts                         $1,100,000
Operating Expenses
               Fixedexpenses               $155,000
               Variableexpenses          $295,000
               TotalExpense                   $450,000
Answer A
PROFORMA INCOME STATEMENT USING PERCENTAGE OF SALES METHOD
Sales $ 2,250,000
less: cost of goods sold $ 1,375,000 (61.11 % * $ 2,250,000)
Gross Profit $ 875,000
less: operating expenses $ 562,500 (25 % * $ 2,250,000)
Operating profits $ 312,500
less: interest expense $ 24,500 same as of year 2015
NP before taxes $ 288,000
less: taxes $ 115,200 (40 % of $ 288,000)
NP after taxes $ 172,800
less: dividends $ 85,000 same as of year 2015
Transfer to Retained Earnings $ 87,800

Cost of goods sold % of Sales = Cost of goods sold/Sales * 100

Cost of goods sold % of Sales = $ 1,100,000/$ 1,800,000 * 100 = 61.11 %

Operating expenses % of Sales = Operating expenses/Sales * 100

Operating expenses % of Sales = $ 450,000/$ 1,800,000 * 100 = 25 %

Answer B
PROFORMA INCOME STATEMENT USING FIXED AND VARIABLE COST DATA

Sales $ 2,250,000
less: cost of goods sold
fixed $ 750,000 fixed amount
variable $ 437,500 (19.44 % * $ 2,250,000)
Gross Profit $ 1,062,500
less: operating expenses
fixed $ 155,000 fixed amount
variable $ 368,750 (16.39 % * $ 2,250,000)
Operating profits $ 538,750
less: interest expense $ 24,500 same as of year 2015
NP before taxes $ 514,250
less: taxes $ 205,700 (40 % *$ 514,250)
NP after taxes $ 308,550
less: dividends $ 85,000 same as of year 2015
Transfer to Retained Earnings $ 223,550

Variable Cost of goods sold % of Sales = Variable Cost of goods sold/Sales * 100
Variable Cost of goods sold % of Sales = $ 350,000/$ 1,800,000 * 100 = 19.44 %

Variable Operating expenses % of Sales = Operating expenses/Sales * 100

Variable Operating expenses % of Sales = $ 295,000/$ 1,800,000 * 100 = 16.39 %

Answer C
Proforma Income statement as per fixed and variable cost data is regarded as more accurate as it distinguishes the
e as it distinguishes the expenses into fixed and variable portions whereas income statement as per percentage of sales ignores the fixed a
age of sales ignores the fixed and variable portions of the cost and applies a single percentage of cost.