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Why the percentage-of-sales method could result

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Reference no: EM132636036

Dagmar Suppliers Ltd wants to a scenario analysis to assess possible profitability for 2021. The company will consider three different sales scenarios. The pessimistic prediction of sales is R840 000, the most likely sales are R1 125 000 and the most optimistic prediction of sales is R1 350 000.

Dagmar's statement of comprehensive income for 2020 is as follows: Dagmar Suppliers Ltd Statement of comprehensive income for the year ended 31 December 2020

Rand Revenue 950,000

Less: Cost of sales 446,500

Gross profit 503,500

Less: Operating expenses 326,250

Operating profit 281,250

Finance cost 45,000

Profit before tax 177,250

Less: Income tax 53,175

Profit for the year 124,075

Question 1: Apply the percentage-of-sales method to the statement of comprehensive income for 2020 to develop the pessimistic and optimistic pro-forma statements of comprehensive income for 2021. Use the table format below to prepare your answer.

Question 2: Explain why the percentage-of-sales method could result in an overstatement of profits for the pessimistic scenario and an understatement of profits for the optimistic scenario.

Reference no: EM132636036

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