Pro forma income

statementScenario

analysisAllen Products LP, wants to do a scenario analysis for the coming year. The pessimistic prediction for sales is

$894,000;

the most likely amount of sales is

$1,135,000;

and the optimistic prediction is

$1,285,000.

Allen's income statement for the most recent year is shown here

LOADING...

.

a. Use the percent-of-sales method, the income statement for December 31,

2019,

and the sales revenue estimates to develop pessimistic, most likely, and optimistic pro forma income statements for the coming year.

b. Explain how this method could result in overstatement of profits for the pessimistic case and 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

2019

costs:

$241,740

of the cost of goods sold is fixed; the rest is variable.

$207,259

of the operating expenses is fixed; the rest is variable. All the interest expense is fixed. (Please see)

d. Compare your findings in part c. to your findings in part a. Do your observations confirm your explanation in part

b?

Click on the icon located on the top-right corner of the data table below in order to copy its contents into a spreadsheet.)

Allen Products, Inc. Income Statement for the Year Ended December 31, 2019
Sales revenue	$936,800
Less: cost of good sold	427,181
Gross profits	$509,619
Less: operating expenses	256,683
Operating profits	$252,936
Less: interest expense	30,914
Net profit before taxes	$222,022
Less: taxes (rate 25%)	55,506
Net profits after taxes	$166,516

(Click on the icon located on the top-right corner of the data table below in order to copy its contents into a spreadsheet.)

Allen Products, Inc. Income Statement for the Year Ended December 31, 2019
Sales revenue	$936,800
Less: cost of good sold
Fixed	241,740
Variable	185,441
Gross profits	$509,619
Less: operating expenses
Fixed	207,259
Variable	49,424
Operating profits	$252,936
Less: interest expense	30,914
Net profit before taxes	$222,022
Less: taxes (rate 25%)	55,506
Net profits after taxes	$166,516