Pro forma income statement: Scenario Analysis

Pro forma income statement: Scenario analysis 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 predic tion is $1,280,000. Allen's income statement for the most recent year follows. P4-16 Allen Products, Inc, lncone Statement for the Year Ended Diecember 31, 201s Sales revemue $937,500 Less Cost of goods sold421.875 S515,625 Less: Operating expenses234.375 $281,250 30,000 Net profits before taxes $251,250 Less: Taxes frase-25%) 62.813 Net profits after taxes $188,437 Gross profis Operating profits Less: Interest expense a. Use the percent-of sales method, the income statement for December 31, 2015, b. Explain how the percent-of-sales method could result in an overstatement of c. Restate the pro forma and the sales revenue estimates to develop pessimistic, most likely, and optimistic pro forma income statements for the coming, year. profits for the pessimistic case and an understatement of profits for the most likely and optimistic cases. 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