Problem: Technology Team manufactures laptops that sell for $2,200 each. Assume Technology Team does not maintain an inventory; all items produced are sold during the period. Thus, all production costs appear on the income statement. The company has fixed manufacturing overhead of $4,000,000 per year. The company's fixed selling and administrative expense is $3,000,000 per year. Other expenses are as follows:
Cost per Unit
Direct materials $1,200
Direct labor 150
Variable manufacturing overhead 50
Variable selling and administrative expense 30
Management at Technology Team believe sales for 2005 will be 10,000 units.
A. Create a pro forma income statement using guide.
B. Discuss how a pro forma income statement helps managers make better decisions.
Panel A - The Pro Forma Income Statement
Sierra Canoe Co.
Pro Forma Income Statement
For the Quarter Ended March 31, 2005
Panel A
Sales $336,000
Cost of goods sold 247,800
Gross margin 88,200
Selling and administrative expenses 68,400
Net Income 19,800
Panel B - The Balance Sheet and Pro Forma Balance Sheet
Sierra Canoe Co.
Balance Sheet and Pro Forma Balance Sheet
At December 31, 2004 and March 31, 2005
Panel B
Balance Sheet Pro Forma BS
12/31/2004 3/31/2005
Assets
Cash $50,000 $71,428
Accounts Receivable 21,600 52,800
Inventory
Raw Materials 1,296 5,508
Finished goods 2,950 14,750
Property, plant, and equipment 350,000 350,000
Total assets $425,846 $494,486
Liabilities and Equity
Accounts payable 33,491 82,331
Contributed capital 300,000 300,000
Retained earnings 92,355 112,155*
Total liabilities and equity $425,846 $494,486
*Beginning retained earnings $ 92,355
Net Income 19,800
Ending retained earnings 112,155