Explain the different components of a pro forma operating income statement

Question

What will be an ideal response?

Answer 1

Revenue: Revenue is the total amount of money a company makes selling its product before any costs are
subtracted. To calculate revenue, the number of units forecasted to be sold is multiplied by the price per unit.
Cost of Goods Sold (COGS): Cost of goods sold (COGS) represents the direct costs incurred in making the product.
In some cases, COGS might be higher than the manufacturing unit costs due to other direct costs, such as shipping.
To calculate COGS, the number of units forecasted to be sold is multiplied by the cost per unit.
Gross Margin Amount: The gross margin amount represents the amount of money a company makes before any
expenses are subtracted. To calculate the gross margin amount, the full absorption cost is subtracted from revenue.
The full absorption cost is defined as the sum of variable costs (direct labor and materials costs) as well as overhead
costs allocated to that product line. Alternatively, the term contribution margin, computed as revenue less variable
costs, is used.
Gross Margin Percentage: The gross margin percentage represents the contribution margin divided by revenue. The
gross margin of a company is compared with that of other similar products in the industry and it can be
determined if the company is higher or lower than the industry average (higher is better). To calculate gross margin
percentage, the following formula is used:
Gross Margin Percentage = (Revenue - Cost of Goods Sold)/Revenue
Expenses, Total: The total expenses represent all the miscellaneous, nonproduction costs associated with making
the product. It includes expenses such as rent, depreciation, insurance, and advertising.
Operating Income: The total expenses are subtracted from the gross margin amount to obtain the operating income.