The 2010 sales forecast for Clearwater Development Co. is $150 million. Interest expense will not change in the coming year. Use Clearwater's 2009 income statement ($ in thousands) presented below to answer the questions that follow.
| Clearwater Development Co. Income Statement |
|
Sales
|
$125,000
|
|
Less: Cost of goods sold
|
80,000
|
|
Gross profit
|
$ 45,000
|
|
Less: Operating expenses
|
30,000
|
|
Less: Interest
|
10,000
|
|
Pretax profit
|
$ 5,000
|
|
Less: Taxes (35%)
|
1,750
|
|
Net income
|
$ 3,250
|
a. Use the percentage-of-sales method to construct a pro forma income statement for 2010.
b. You learn that 25 percent of the cost of goods sold and operating expense figures for 2009 are fixed costs that will not change in 2010. Reconstruct the pro forma income statement.
c. Compare and contrast the statement prepared in parts (a) and (b). Which statement will likely provide the better estimate of 2010 income? Explain.