Table 4.6
Income Statement
Ace Manufacturing, Inc.
For the Year Ended December 31, 2015
-Ace Manufacturing, Inc., is preparing pro forma financial statements for 2016. The firm utilized the percent-of-sales method to estimate costs for the next year. Sales in 2015 were $2 million and are expected to increase to $2.4 million in 2016. The firm has a 40 percent tax rate.
(a) Given the 2015 income statement in Table 4.6, estimate net profit and retained earnings for 2016.
(b) If $200,000 of the cost of goods sold and $40,000 of selling expense are fixed costs; and the interest expense and dividends are not expected to change, what is he dollar effect on net income and retained earnings? What is the significance of this effect?

Question

Table 4.6
Income Statement
Ace Manufacturing, Inc.
For the Year Ended December 31, 2015 
-Ace Manufacturing, Inc., is preparing pro forma financial statements for 2016. The firm utilized the percent-of-sales method to estimate costs for the next year. Sales in 2015 were $2 million and are expected to increase to $2.4 million in 2016. The firm has a 40 percent tax rate.
(a) Given the 2015 income statement in Table 4.6, estimate net profit and retained earnings for 2016.
(b) If $200,000 of the cost of goods sold and $40,000 of selling expense are fixed costs; and the interest expense and dividends are not expected to change, what is he dollar effect on net income and retained earnings? What is the significance of this effect?

Quizplus · Accepted Answer

The Answer of Table 4.6
Income Statement
Ace Manufacturing, Inc.
For the Year Ended December 31, 2015 
-Ace Manufacturing, Inc., is preparing pro forma financial statements for 2016. The firm utilized the percent-of-sales method to estimate costs for the next year. Sales in 2015 were $2 million and are expected to increase to $2.4 million in 2016. The firm has a 40 percent tax rate.
(a) Given the 2015 income statement in Table 4.6, estimate net profit and retained earnings for 2016.
(b) If $200,000 of the cost of goods sold and $40,000 of selling expense are fixed costs; and the interest expense and dividends are not expected to change, what is he dollar effect on net income and retained earnings? What is the significance of this effect?

Table 4.6 Income Statement