Preparing Martin Manufacturing’s 2015 Pro Forma Financial Statements. To improve its competitive position, Martin Manufacturing is planning to implement a major equipment modernization program. Included will be replacement and modernization of key manufacturing equipment at a cost of $400,000 in 2015. The planned program is expected to lower the variable cost per unit of finished product. Terri Spiro, an experienced budget analyst, has been charged with preparing a forecast of the firm’s 2015 financial position, assuming replacement and modernization of manufacturing equipment. She plans to use the 2014 financial statements, along with the key projected financial data summarized in the attached table
Sales revenue $5,075,000
Less: Cost of goods sold 3,704,000
Gross Profit $1,371,000
Less: Operating expenses
Selling expense $650,000
General and administrative expenses $416,000
Depreciation expense $152,000
Total operating expense $1,218,000
Operating profit $153,000
Less: Interest expense $93,000
Net profit before taxes $60,000
Less: Income Taxes $24,000
Net profit $ 36,000
1. Use the historical and projected financial data provided to prepare a pro forma income statement for the year ended December 31, 2015. (Hint: Use the percent of sales method to estimate all values except depreciation and interest expense, which have been estimated by management and included in the table.)
2. Use the projected financial data along with relevant data from the pro forma income statement prepared in part (1) to prepare the pro forma balance sheet at December 31, 2015. (Hint: Use the judgmental approach.)
3. Will Martin Manufacturing Company need to obtain external financing to fund the proposed equipment modernization program? Explain