To retained earnings Inc., wants to 94-18 Pro forma income statement: Scenario a
ID: 2821963 • Letter: T
Question
To retained earnings Inc., wants to 94-18 Pro forma income statement: Scenario analysis Allen Products, Inc. scenario analysis for the coming year. The pessimistic prediction for S00,000 the most likely amount of sales is $1,125,000, and the oprin is tion is $1,280,000. Allen's income statement for the most recent year fouttic Allen Products, Inc., Income Statement for the Year Ended December 31, 2015 $937,500 Sales revenue Less: Cost of goods sold421,875 $515,625 Gross profits Less: Operating expenses 234,375 $281,250 30,000 Net profits before taxes $251,250 Less: Taxes (rate 25%) 62,813 Net profits after taxes $188,437 Operating profits Less: Interest expense a. Use the percent-of-sales method, the income statement for December 31, 2 b. Explain how the percent-of-sales method could result in an overstatement of c. Restate the pro forma income statements prepared in part a to incorporate and the sales revenue estimates to develop pessimistic, most likely, and optimis pro forma income statements for the coming year. profits for the pessimistic case and an understatement of profits for the likely and optimistic cases. following assumptions about the 2015 costs S250,000 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. copar por ridigin an pra Do your confirm your explanation in part b? in part a. Do your obsernatExplanation / Answer
Allen Products, Inc. Income Statement for the Year Ended December 31, 2015 Dollars Percentage Sales revenue =(A) $ 9,37,500.00 100% Less: Cost of goods sold =(B)=(B)/(A) $ 4,21,875.00 45.00% Gross Profit =( C)=(C )/(A) $ 5,15,625.00 55.00% Less: Operating expenses =(D)=(D)/(A) $ 2,34,375.00 25.00% Operating profits =(E )=€/(A) $ 2,81,250.00 30.00% Less: Interest Expense =(F )=(F )/(A) $ 30,000.00 3.20% Net profit before taxes =(G )=(G)/(A) $ 2,51,250.00 26.80% Less: Taxes (rate = 25%) =(H)=(H)/(A) $ 62,813.00 6.70% Net profit after taxes =(I)=(I)/(A) $ 1,88,437.00 20.10% Income Statement Allen Products Inc. a) a Pessimistic Mostlikely Optimistic Sales revenue =(A) $ 9,00,000.00 $ 11,25,000.00 $ 12,80,000.00 Less: Cost of goods sold =(B)=(A)*45% $ 4,05,000.00 $ 5,06,250.00 $ 5,76,000.00 Gross Profit=(C )=(A)-(B) $ 4,95,000.00 $ 6,18,750.00 $ 7,04,000.00 Less: Operating expenses =(D)=(A)*25% $ 2,25,000.00 $ 2,81,250.00 $ 3,20,000.00 Operating profits =(E )=(C )-(D ) $ 2,70,000.00 $ 3,37,500.00 $ 3,84,000.00 Less: Interest Expense =(F)=(A)*3.20% $ 28,800.00 $ 36,000.00 $ 40,960.00 Net profit before taxes =(G)=(E )-(F ) $ 2,41,200.00 $ 3,01,500.00 $ 3,43,040.00 Less: Taxes =(H)=(A)*6.70% $ 60,300.00 $ 75,375.00 $ 85,760.00 Net profit after taxes =(I)=(G)-(H) $ 1,80,900.00 $ 2,26,125.00 $ 2,57,280.00 b In Pessimistic case Sales are decrease and cost are also decrease but only variable cost , fixed cost per unit will be change due to increase or decrease in sales but total amount will not be affected, so in pessimistic case understatement of cost and overstatement of Profit.The reverse scenario in case of optimistic and most likely. c) Income Statement Allen Products Inc. a Pessimistic Mostlikely Optimistic c ) Sales revenue =(A) $ 9,00,000.00 $ 11,25,000.00 $ 12,80,000.00 Less: Cost of goods sold Fixed Cost $ 2,50,000.00 $ 2,50,000.00 $ 2,50,000.00 Variable Cost=(Sales*18.3%) $ 1,64,700.00 $ 2,05,875.00 $ 2,34,240.00 Total Cost of goods sold $ 4,14,700.00 $ 4,55,875.00 $ 4,84,240.00 Gross Profit=(C )=(A)-(B) $ 4,85,300.00 $ 6,69,125.00 $ 7,95,760.00 Less: Operating expenses Fixed $ 1,80,000.00 $ 1,80,000.00 $ 1,80,000.00 Variable Cost=(Sales*5.80%) $ 52,200.00 $ 65,250.00 $ 74,240.00 Total Operating Expenses=(D) $ 2,32,200.00 $ 2,45,250.00 $ 2,54,240.00 Operating Profit=(E )=(C )-(D) $ 2,53,100.00 $ 4,23,875.00 $ 5,41,520.00 Interest Expenes=(F) $ 30,000.00 $ 30,000.00 $ 30,000.00 Net profit before taxes =(G)=(E )-(F ) $ 2,23,100.00 $ 3,93,875.00 $ 5,11,520.00 Less: Taxes =(H)=(G)*25% $ 55,775.00 $ 98,468.75 $ 1,27,880.00 Net profit after taxes =(I)=(G)-(H) $ 1,67,325.00 $ 2,95,406.25 $ 3,83,640.00 sales=(A) $ 9,37,500.00 Less: Cost of goods sold Fixed $ 2,50,000.00 Variable=($171875/$937500) $ 1,71,875.00 18.33% Total $ 4,21,875.00 Operatring Expenses Less: Fixed $ 1,80,000.00 Variable=($54375/$937500) $ 54,375.00 5.80% Total $ 2,34,375.00 Interest Expenses Fixed $ 30,000.00 Taxes=($62813/$251250) $ 62,813.00 25% d) The Profit is more in case of pessimistic in part a than in part C but in optimistic and mostlikely Profit is less in part a than in part c it will be confirmed the result of part b. Pessimistic Most Likely Optimistic Part a $ 1,80,900.00 $ 2,26,125.00 $ 2,57,280.00 Part C $ 1,67,325.00 $ 2,95,406.25 $ 3,83,640.00
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