(a) Pro Forma Income Statement Metroline Manufacturing, Inc. For the Year Ended December 31, 2013 (percent-of-sales method) Sales $1,500,000 Less: Cost of goods sold (0.65 1500000) Gross profits Less: Operating expenses (0.086 1500000) 975,000 525,000 129,000 Operating profits Less: Interest expense 396,000 35,000 Net profits before taxes 361,000 Less: Taxes (0.40 NPBT) Net profits after taxes 144,400 216,600 Less: Cash dividends To retained earnings 70,000 $146,600 % of CGS= 910000/1400000*100= 65% % of Operating Expenses= 120000/1400000*100=8.6% (b) Pro Forma Income Statement Metroline Manufacturing, Inc. For the Year Ended December 31, 2013 (based on fixed and variable cost data) Sales Less: Cost of goods sold Fixed cost Variable cost (0.50 1500000) Gross profits Less: Operating expense: Fixed expense Variable expense (0.06 1500000) Operating profits Less: Interest expense Net profits before taxes Less: Taxes (0.40 NPBT) Net profits after taxes Less: Cash dividends To retained earnings $1,500,000 210,000 750,000 540,000 36,000 90,000 414,000 35,000 379,000 151,600 227,400 70,000 157,400 % of Variable CGS= 700000/1400000*100=50 % % of Variable Operating Expenses= 84000/1400000*100=6% Pro Forma Balance Sheet Leonard Industries December 31, 2013 ASSETS AMOUNT LIABILITES & EQUITY AMOUNT CASH 50,000 A/P(14% OF 3000,000) 420,000 MARKETABLE SECURITIES 15,000 ACCURALS 60,000 OTHER C.LIABITIES 30,000 A/R (10% OF 3000,000) 300,000 TOTAL C.LIABLITIES 510,000 INV(12% OF 3000,000) 360,000 LONG TERM DEBT 350,000 TOTAL C.ASSETS 725,000 TOTAL LIABILITIES 860,000 NET FIXED ASSTS(W1) 658,000 COMMON STOCK 200,000 TOTAL ASSETS 1383,000 RETAIND EARNING(W2) 270,000 TOTAL LIABILITES & EQUITY 1330,000 ADDITIONAL FINANCE REQUIRED 53,000 WORKING 1 NET FIXED ASSETS 2012 600,000 ADD NEW 90,000 TOTAL 690,000 1383,000 LESS DEPRECIATION NET FIXED ASSETS 2013 32,000 658,000 WORKING 2 NET PROFIT 2013 (3000,000*4/100) 120,000 EXPECTED DIVIDEND (70,000) RETAINED EARNING 50,000 RETAINED EARNING (2012) 220,000 270,000