In addition to the information provided in Baldwin Piano I, consider the following information provided with information from the annual report and 10-K statement of Baldwin Piano and Organ company.

Interest income on installment receivables represents interest on receivables not sold to the independent financial institution.

The following summary table was prepared on the basis of the business segment data reported by Baldwin:

The cash flow statement indicates that the company has repaid long-term debt of about \($8.6\) million, \($5.6\) million, and \($8.3\) million during Year 1, Year 2, and Year 3, respectively. The balance sheet indicates that the book value of the company’s finished goods inventory decreased by about 8% from Year 2 to Year 3.
In March Year 3, the contents of one of the company’s finished goods warehouses were damaged by exposure to smoke from a fire adjacent to the warehouse. The company has received insurance proceeds equal to the wholesale value of the destroyed inventory. Accordingly, a gain of approximately \($1,412,000\) on the insurance settlement is included in the Year 3 consolidated statements of earnings in the component labeled Other operating income, net.
On January 27, Year 3, the company entered into an agreement in principle whereby Peridot Associates, Inc. (Peridot) would acquire all outstanding shares of the company’s common stock at a per share price of \($18.25\), subject to certain contingencies. The agreement expired on May 16, Year 3. Under the agreement, the company was obligated to reimburse Peridot \($800,000\) for certain expenses incurred by Peridot. Additionally, the company incurred other expenses of approximately \($305,000\) related to the proposed acquisition. These combined expenses are included in the Year 3 consolidated statements of earnings as the component labeled Other operating income, net.
Required:
Identify and explain the sources of the change in Baldwin's profitability from Year 2 to Year 3 with a view to evaluating its current earnings quality and future prospects. To what extent can this change be attributed to changes in the management’ estimates?
(Hint: Preparing a common-size income statement and/or year-to-year percentage change analysis of income statement items will help you formulate your response.) Additional information regarding Baldwin Piano can be found in case C2-3.

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Income Statements for the Years Ended December 31 Year 3 Net sales $120,657,455 Year 2 $110,076,904 Year I $103,230,431 Cost of goods sold (89,970,702) (79,637,060) (74,038,724) Gross profit 30,686,753 30,439,844 29,191,707 Income on the sale of installment receivables 5,746,125 5,256,583 4,023,525 Interest income on installment receivables 443,431 308,220 350,058 Other operating income, net 3,530,761 3,803,228 40,407,070 39,807,875 3,768,760 37,334,050 Operating expenses Selling, general, and administrative expense (26,187,629) (25,118,465) (23,970,568) Provision for doubtful accounts (1,702,234) (2,053,189) (2,131,644) Operating profit 12,517,207 12,636,221 11,231,838 Interest expense (2,232,258) (2,610,521) (3,932,830) Income before income taxes 10,284,949 10,025,700 Income taxes (4,120,000) (4,090,000) 7,299,008 (2,884,000) Income before cumulative effects of 6,164,949 5,935,700 4,415,008 change in accounting principles Cumulative effect of changes in postretirement and postemployment benefits Net income (1,604,000) $ 4,560,949 $ 5,935,700 $ 4,415,008