Reference no: EM131974386

Pro forma income statementlong dash—Scenario analysis. Allen Products, Inc., 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 $ 1,133,000; and the optimistic prediction is $ 1,285,000. Allen's income statement for the most recent year is shown here Allen Products, Inc. Income Statement for the Year Ended December 31, 2015 Sales revenue $ 938,300 Less: cost of good sold 425,050 Gross profit $ 513,250 Less: operating expenses 202,673 Operating profits $ 310,577 Less: interest expense 29,087 Net profit before taxes $ 281,490 Less: taxes (rate 25%) 70,373 Net profits after taxes $211,117 . a. Use the percent-of-sales method, the income statement for December 31, 2015, 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 2015 costs: $ 238,736 of the cost of goods sold isfixed; the rest is variable. $ 137,520 of the operating expenses is fixed; the rest is variable. All the interest expense is fixed. (Please see: Allen Products, Inc. Income Statement for the Year Ended December 31, 2015 Sales revenue $ 938,300 Less: cost of good sold Fixed 238,736 Variable 186,314 Gross profits $ 513,250 Less: operating expenses Fixed 137,520 Variable 65,153 Operating profits $ 310,577 Less: interest expense 29,087 Net profit before taxes $ 281,490 Less: taxes (rate 25%) 70,373 Net profits after taxes $211,117 . d. Compare your findings in part c. to your findings in part a. Do your observations confirm your explanation in part b?