Question

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Allen Products, Inc. Income Statement for the Year Ended December 31, 2019 Sales revenue $937,100 Less: cost of good sold Fixed 215,673 Variable 184,469 Gross profits $536,958 Less: operating expenses Fixed 132,722 Variable 56,572 Operating profits $347,664 Less: interest expense 32,799 Net profit before taxes $314,865 Less: taxes (rate 25%) 78,716 Net profits after taxes $236,149

Answer 1

Answer:

a.

Allen Products, Inc
for the Year Ended December 31, 2020
	Pessimistic
Sales	894,000
Less cost of goods sold	381,738	42.7%
Gross profits	512,262
Less operating expense	180,588	20.2%
Operating profits	331,674
Less interest expense	31,290	3.5%
Net profit before taxes	300,384
Taxes	90,115
Net profits after taxes	210,269

Allen Products, Inc
for the Year Ended December 31, 2020
	Most Likely
Sales	1,134,000
Less cost of goods sold	484,218	42.7%
Gross profits	649,782
Less operating expense	229,068	20.2%
Operating profits	420,714
Less interest expense	39,690	3.5%
Net profit before taxes	381,024
Taxes	114,307
Net profits after taxes	266,717

Allen Products, Inc
for the Year Ended December 31, 2020
	Optimistic
Sales	1,281,000
Less cost of goods sold	546,987	42.7%
Gross profits	734,013
Less operating expense	258,762	20.2%
Operating profits	475,251
Less interest expense	44,835	3.5%
Net profit before taxes	430,416
Taxes	129,125
Net profits after taxes	301,291

b.

When using the percent-of-sales method, it assumes that all the costs are variable and hence there are no fixed expenses. So in the pessimistic situation, this will cause all costs to decrease with the loweest level of sales. But usually the fixed costs will not decrease.It is opposite in case of the optimistic situation as the percent-of-sales assumes that the variable costs will increase.

c.

Allen Products, Inc
for the Year Ended December 31, 2020
	Pessimistic
Sales	894,000
Less cost of goods sold
Fixed	215,673
Variable	176,118	19.7%
Gross profits	502,209
Less operating expense
Fixed	132,722
Variable	53,640	6.0%
Operating profits	315,847
Less interest expense	32,799
Net profit before taxes	283,048
Taxes	84,914
Net profits after taxes	198,134

Allen Products, Inc
for the Year Ended December 31, 2020
	Most Likely
Sales	1,134,000
Less cost of goods sold:
Fixed	215,673
Variable	223,398	19.7%
Gross profits	694,929
Less operating expense:
Fixed	132,722
Variable	68,040	6.0%
Operating profits	494,167
Less interest expense	32,799
Net profit before taxes	461,368
Taxes	138,410
Net profits after taxes	322,958

Allen Products, Inc
for the Year Ended December 31, 2020
	Optimistic
Sales	1,281,000
Less cost of goods sold
Fixed	215,673
Variable	252,357	19.7%
Gross profits	812,970
Less operating expense
Fixed	132,722
Variable	76,860	6.0%
Operating profits	603,388
Less interest expense	32,799
Net profit before taxes	570,589
Taxes	171,177
Net profits after taxes	399,412

d.

The profits for the pessimistic situation is hgher in question (a) than in question (c).

The profits for the optimistic situation is lesser in question (a) than in question (c).

Calculation:

a.

To perform the ​percent-of-sales method, and calculate the estimates to develop ​pessimistic, most​ likely, and optimistic pro forma income statements for the 2020, first we need to take the income statement provided in the question and take the Sales as the base.

Sales  (a)	937,100
Less cost of goods sold (b)	400,142	42.7% (b)/(a)
Gross profits	536,958
Less operating expense (c)	189,294	20.2% (c)/(a)
Operating profits	347,664
Less interest expense (d)	32,799	3.5% (d)/(a)
Net profit before taxes	314,865
Taxes	78,716
Net profits after taxes	236,149

Then we need to multiply the percentage with the pessimistic prediction for sales is $894,000; the most likely amount of sales is $1,134,000; and the optimistic prediction is $1,281,000.

The tax rate is changed to 30% so we need to consider that while calculating taxes.

c.

Here we need to restate the pro forma income statements prepared with the fixed cost of goods sold as 215,673 and the fixed operating expenses as 132,722. Here the interest expense is fixed.

So to calculate the variable portion we need to do the below calculation:

Cost of goods sold variable percentage = ($400,142 - $215,673) / $937,100 = 19.7%

Operating expense variable percentage=($189,294 - $132,722) / $937,100 = 6.0%

Then we need to multiply the percentage with the pessimistic prediction for sales is $894,000; the most likely amount of sales is $1,134,000; and the optimistic prediction is $1,281,000.

The tax rate is changed to 30% so we need to consider that while calculating taxes.