Pro forma income statement: Scenario analysis Smyth Inc. has decided to do a scenario analysis for the year 2018. Their pessimistic prediction for sales is $360,000, the most likley amount of sale is $450,000, and the optimistic sales prediction is $520,000. Smyth’s income statement for the latest year follows.
a. Refer the income statement for December 31, 2017, and using the percent-of sales method, develop the pessimistic, most likely, and optimistic pro forma income statement for the coming year ending on December 31, 2018.
b. The percent-of-sales method may result in an overstatement of profits for the pessimistic case and an understatement of profit for the most likely and optimistic cases. Explain why.
c. Restate the pro forma income statement in part to accommodate the following information about the 2018 costs:
$75,000 of the cost of goods sold is fixed, rest is variable.
$40,000 of operating expenses is fixed, rest is variable.
All the interest expense is fixed.
d. Compare your results in part a to the results in part c. Do your observations confirm your explanation in part b?
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