The 2013 sales forecast for Clearwater Development Co. is $150 million. Interest expense will not change in the coming year. Use Clearwater’s 2012 income statement ($ 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 2013.
b. You learn that 25 percent of the cost of goods sold and operating expense figures for 2012 are fixed costs that will not change in 2013. 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 2013 income? Explain.