Pro forma income statement-Scenario analysis Allen Products LP, wants to do a scenario analysis for the coming year. The pessimistic prediction for sales is $899,000; the most likely amount of sales is $1,119,000; and the optimistic prediction is $1,290,000. 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: $262,262 of the cost of goods sold is fixed; the rest is variable. $193,537 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? 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 $ 1% Less: Cost of goods sold Gross profits Less: Operating expense Operating profits Less: Interest expense Net profits before taxes to | es Taxes (30%) to 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%) A | 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 (1) 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 The simple percent-of-sales method assumes that all costs are variable. In reality some of the expenses will be fixed. In the (1) 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 (3) of costs in the (4) _ case and an (5) _ of profits. The opposite occurs in the (6) scenario. c. Restate the pro forma income statements prepared in part a. to incorporate the following assumptions about the 2019 costs: $262,262 of the cost of goods sold is fixed; the rest is variable. $193,537 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 A Variable A Gross profits A Less: Operating expense Fixed A Variable A Operating profits A Less: Interest expense A A Net profits before taxes Taxes (30%) A 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 A Variable A A Gross profits Less: Operating expense Fixed A Variable A Operating profits A Less: Interest expense A Net profits before taxes A Taxes (30%) A 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 6 Variable A Gross profits 64 Less: Operating expense Fixed 9 6 Variable Operating profits 6 6 Less: Interest expense Net profits before taxes Taxes (30%) 6 Net profits after taxes 6 || 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.) case are larger in part a. than in part c. For the (8) case, the profits are lower in part a. than in part c. The profits for the (7) - This outcome (9) the results as stated in part b. 1: Data Table (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 $937,800 Less: cost of good sold 444,517 Gross profits $493,283 Less: operating expenses 255,082 Operating profits $238,201 Less: interest expense 30,010 Net profit before taxes $208,191 Less: taxes (rate 30%) 62,457 Net profits after taxes $145,734 2: Data Table (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 $937,800 Less: cost of good sold Fixed 262,262 Variable 182,255 Gross profits $493,283 Less: operating expenses Fixed 193,537 Variable 61,545 Operating profits $238,201 Less: interest expense 30,010 Net profit before taxes $208,191 Less: taxes (rate 30%) 62,457 Net profits after taxes $145,734 pessimistic most likely optimistic pessimistic most likely optimistic understatement overstatement pessimistic O most likely optimistic understatement O overstatement O pessimistic most likely optimistic O O pessimistic (9) O pessimistic most likely optimistic confirms disproves most likely optimistic O Pro forma income statement-Scenario analysis Allen Products LP, wants to do a scenario analysis for the coming year. The pessimistic prediction for sales is $899,000; the most likely amount of sales is $1,119,000; and the optimistic prediction is $1,290,000. 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: $262,262 of the cost of goods sold is fixed; the rest is variable. $193,537 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? 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 $ 1% Less: Cost of goods sold Gross profits Less: Operating expense Operating profits Less: Interest expense Net profits before taxes to | es Taxes (30%) to 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%) A | 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 (1) 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 The simple percent-of-sales method assumes that all costs are variable. In reality some of the expenses will be fixed. In the (1) 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 (3) of costs in the (4) _ case and an (5) _ of profits. The opposite occurs in the (6) scenario. c. Restate the pro forma income statements prepared in part a. to incorporate the following assumptions about the 2019 costs: $262,262 of the cost of goods sold is fixed; the rest is variable. $193,537 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 A Variable A Gross profits A Less: Operating expense Fixed A Variable A Operating profits A Less: Interest expense A A Net profits before taxes Taxes (30%) A 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 A Variable A A Gross profits Less: Operating expense Fixed A Variable A Operating profits A Less: Interest expense A Net profits before taxes A Taxes (30%) A 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 6 Variable A Gross profits 64 Less: Operating expense Fixed 9 6 Variable Operating profits 6 6 Less: Interest expense Net profits before taxes Taxes (30%) 6 Net profits after taxes 6 || 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.) case are larger in part a. than in part c. For the (8) case, the profits are lower in part a. than in part c. The profits for the (7) - This outcome (9) the results as stated in part b. 1: Data Table (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 $937,800 Less: cost of good sold 444,517 Gross profits $493,283 Less: operating expenses 255,082 Operating profits $238,201 Less: interest expense 30,010 Net profit before taxes $208,191 Less: taxes (rate 30%) 62,457 Net profits after taxes $145,734 2: Data Table (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 $937,800 Less: cost of good sold Fixed 262,262 Variable 182,255 Gross profits $493,283 Less: operating expenses Fixed 193,537 Variable 61,545 Operating profits $238,201 Less: interest expense 30,010 Net profit before taxes $208,191 Less: taxes (rate 30%) 62,457 Net profits after taxes $145,734 pessimistic most likely optimistic pessimistic most likely optimistic understatement overstatement pessimistic O most likely optimistic understatement O overstatement O pessimistic most likely optimistic O O pessimistic (9) O pessimistic most likely optimistic confirms disproves most likely optimistic O