Allen Products, Inc., wants to do a scenario analysis for the coming year. The pessimistic prediction for sales is $900,000; the most likely amount of sales is $1,125,000; and the optimistic prediction is $1,280,000. Allen’s income statement for the most recent year follows.

a. Use the percent-of-sales method, the income statement for December 31, 2015, and the sales revenue estimates to develop pessimistic, most likely, and optimistic pro forma income statements for the coming year.
b. Explain how the percent-of-sales method could result in an overstatement of profits for the pessimistic case and an understatement of profits for the most likely and optimistic cases.
c. Restate the pro forma income statements prepared in part a to incorporate the following assumptions about the 2015 costs: $250,000 of the cost of goods sold is fixed; the rest is variable. $180,000 of the operating expenses is fixed; the rest is variable. All the interest expense is fixed.
d. Compare your findings in part c to your findings in part a. Do your observations confirm your explanation in part b?

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Allen Products, Inc., Income Statement for the Year Ended December 31, 2015 Sales revenue Less: Cost of goods sold Gross profits Less: Operating expenses Operating profits Less: Interest expense Net profits before taxes Less: Taxes (rate = 25%) Net profits after taxes $937,500 421,875 $515,625 234,375 $281,250 30,000 $251,250 62,813 $188,437