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 $903,000; the most likely amount of sales is $1,117,000; and the optimistic prediction is $1,274,000. Allen's income statement for the most recent year is shown here : 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: $221,206 of the cost of goods sold is fixed; the rest is variable. $153,758 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? Data Table - X (Click on the icon here e in order to copy the contents of the data table below into a spreadsheet.) Allen Products, Inc. Income Statement for the Year Ended December 31, 2019 Sales revenue $938,400 Less: cost of good sold 400,697 Gross profits $537,703 Less: operating expenses 212,078 Operating profits $325,625 Less: interest expense 30,967 Net profit before taxes $294,658 Less: taxes (rate 30%) 88,397 Net profits after taxes $206,261 -X Data Table (Click on the icon here e in order to copy the contents of the data table below into a spreadsheet.) Allen Products, Inc. Income Statement for the Year Ended December 31, 2019 Sales revenue $938,400 Less: cost of good sold Fixed 221,206 Variable 179,491 Gross profits $537,703 Less: operating expenses Fixed 153,758 Variable 58,320 Operating profits $325,625 Less: interest expense 30,967 Net profit before taxes $294,658 Less: taxes (rate 30%) 88,397 Net profits after taxes $206,261 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. Complete the pro forma income statement for the year ending December 31, 2020 that is shown below (pessimistic scenario): (Round the percentage of sales to one decimal place and the pro forma income statement accounts to the nearest dollar.) Pro Forma Income Statement Allen Products, Inc. for the Year Ended December 31, 2020 Pessimistic Sales $ $ % $ $ Less: Cost of goods sold Gross profits Less: Operating expense Operating profits Less: Interest expense Net profits before taxes Taxes (30%) $ % $ Net profits after taxes $ Complete the pro forma income statement for the year ending December 31, 2020 that is shown below (most likely scenario): (Round the percentage of sales to one decimal place and the pro forma income statement accounts to the nearest dollar.) Pro Forma Income Statement Allen Products, Inc. for the Year Ended December 31, 2020 Most Likely Sales $ $ % $ $ % $ Less: Cost of goods sold Gross profits Less: Operating expense Operating profits Less: Interest expense Net profits before taxes Taxes (30%) Net profits after taxes $ % $ $ 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. Complete the pro forma income statement for the year ending December 31, 2020 that is shown below (pessimistic scenario): (Round the percentage of sales to one decimal place and the pro forma income statement accounts to the nearest dollar.) Pro Forma Income Statement Allen Products, Inc. for the Year Ended December 31, 2020 Pessimistic Sales $ $ % $ $ Less: Cost of goods sold Gross profits Less: Operating expense Operating profits Less: Interest expense Net profits before taxes Taxes (30%) $ % $ Net profits after taxes $ Complete the pro forma income statement for the year ending December 31, 2020 that is shown below (most likely scenario): (Round the percentage of sales to one decimal place and the pro forma income statement accounts to the nearest dollar.) Pro Forma Income Statement Allen Products, Inc. for the Year Ended December 31, 2020 Most Likely Sales $ $ % $ $ % $ Less: Cost of goods sold Gross profits Less: Operating expense Operating profits Less: Interest expense Net profits before taxes Taxes (30%) Net profits after taxes $ % $ $ Complete the pro forma income statement for the year ending December 31, 2020 that is shown below (optimistic scenario): (Round the percentage of sales to one decimal place and the pro forma income statement accounts to the nearest dollar.) Pro Forma Income Statement Allen Products, Inc. for the Year Ended December 31, 2020 Optimistic Sales $ $ % Less: Cost of goods sold Gross profits $ $ % $ $ % Less: Operating expense Operating profits Less: Interest expense Net profits before taxes Taxes (30%) Net profits after taxes $ $ $ 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. (Select from the drop-down menus.) The simple percent-of-sales method assumes that all costs are variable. In reality some of the expenses will be fixed. In the case this assumption causes all costs to decrease with the lower level of sales when in reality the fixed portion of the costs will not decrease. The opposite occurs for the forecast since the percent-of-sales assumes all costs increase when in reality only the variable portion will increase. This pattern results in an of costs in the case and an of profits. The opposite occurs in the scenario. c. Restate the pro forma income statements prepared in part a. to incorporate the following assumptions about the 2019 costs: $221,206 of the cost of goods sold is fixed; the rest is variable. $153,758 of the operating expenses is fixed; the rest is variable. All the interest expense is fixed. c. Restate the pro forma income statements prepared in part a. to incorporate the following assumptions about the 2019 costs: $221,206 of the cost of goods sold is fixed; the rest is variable. $153,758 of the operating expenses is fixed; the rest is variable. All the interest expense is fixed. Complete the pro forma income statement for the year ending December 31, 2020 that is shown below (pessimistic scenario): (Round the percentage of sales to four decimal places and the pro forma income statement accounts to the nearest dollar.) Pro Forma Income Statement Allen Products, Inc. for the Year Ended December 31, 2020 Pessimistic Sales Less: Cost of goods sold Fixed $ $ $ Variable Gross profits Less: Operating expense Fixed $ $ $ $ Variable Operating profits Less: Interest expense Net profits before taxes Taxes (30%) Net profits after taxes $ $ $ Complete the pro forma income statement for the year ending December 31, 2020 that is shown below (most likely scenario): (Round the percentage of sales to four decimal places and the pro forma income statement accounts to the nearest dollar.) Pro Forma Income Statement Allen Products, Inc. for the Year Ended December 31, 2020 Most Likely Sales $ Less: Cost of goods sold Fixed $ Variable $ S Gross profits Less: Operating expense Fixed $ $ % $ Variable Operating profits Less: Interest expense Net profits before taxes Taxes (30%) $ $ Net profits after taxes $ Complete the pro forma income statement for the year ending December 31, 2020 that is shown below (optimistic scenario): (Round the percentage of sales to four decimal places and the pro forma income statement accounts to the nearest dollar.) Pro Forma Income Statement Allen Products, Inc. for the Year Ended December 31, 2020 Optimistic Sales $ Less: Cost of goods sold Fixed $ Variable $ $ Gross profits Less: Operating expense Fixed $ $ Variable Operating profits $ Less: Interest expense $ $ Net profits before taxes Taxes (30%) Net profits after taxes EA $ d. Compare your findings in part c. to your findings in part a. Do your observations confirm your explanation in part b? (Select from the drop-down menus.) The profits for the case are larger in part a. than in part c. For the V case, the profits are lower in part a. than in part c. This outcome the results as stated in part b
