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.