Allen Products Inc and Metroline Manufacturing: Income Statements

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Table of Contents

Percent of Sales Method
Allen Products Inc.
Metroline Manufacturing
Reference

Percent of Sales Method

This technique presupposes that most financial statements vary in terms of sales turnover. Moreover, the technique uses a theory suggesting that the company will perform well financially in future. In this regard, the theory applies many variables to predict the future. It assumes that the variable costs will always depend on the volume of sales realized. It therefore follows that these variables will always be in the form of a percentage of sales in a particular period. For example, a company will assume that the direct cost of materials will always vary with the volume of sales since the raw materials are assumed to drive sales (Trankle, & Gelau, 1992).

Allen Products Inc.

Income Statement. For the year ended July 31, 2010.

	Pessimistic	Optimistic
Sales	$900,000	$1,125,000	$1,280,000
Less cost of goods sold (45%)	405,000	506,250	576,000
Gross profits	$495,000	$618,750	$704,000
Less operating expense (25%)	225,000	281,250	320,000
Operating profits	$270,000	$337,500	$384,000
Less interest expense (3.2%)	28,800	36,000	40,960
Net profit before taxes	$241,200	$301,500	$343,040
Taxes (25%)	60,300	75,375	85,760
Net profits after taxes	$180,900	$226,125	$257,280

b) or quantities it expects to sell in a particular period based on the sales of the previous period. This would determine the current or future sales. However, not all costs will be variable. If the previous period was low, a company may under cast future sales based on poor results. This will lead to the understatement of sales in most situations. A previous period may have good results due to extra-ordinary conditions. If this is used to estimate or forecast future sales, it may give an overestimation of sales. As a result, profits may fall because the sales are overstated. Most companies face this problem. However, some companies have come up with strategies to counter the problem.
Income Statement. For the year ended July 31, 2010.

	Pessimistic	Optimistic
Sales	$900,000	$1,125,000	$1,280,000
Less cost of goods sold:
Fixed	250,000	250,000	250,000
Variable (18.3%)	164,700	205,875	234,240
Gross profits	$485,300	$669,125	$795,760
Less operating expense:
Fixed	180,000	180,000	180,000
Variable (5.8%)	52,200	65,250	74,240
Operating profits	$253,100	$423,875	$541,520
Less interest expense:
Net profit before taxes	$223,100	$393,875	$511,520
Taxes (25%)	55,775	98,469	127,880
Net profits after taxes	$167,325	$295,406	$383,640

The pessimist has lower profits in part c than in the first part whereas the optimistic has higher profits in part c than in the first part. This is as explained in part b above.

Metroline Manufacturing

Income Statement. For the year ended December 31, 2009.

Sales	$1,500,000
Less: Cost of goods sold (65% sales)	975,000
Gross profits	$525,000
Less: Operating expenses (8.6% sales)	129,000
Operating profits	$396,000
Less: Interest expense	35,000
Net profits before taxes	$361,000
Less: Taxes (40% NPBT)	144,400
Net profits after taxes	$216,600
Less: Cash dividends	70,000
To retained earnings	$146,600

Income Statement. For the year ended December 31, 2009.

Sales	$1,500,000
Less: Cost of goods sold
Fixed cost	210,000
Variable cost (50% sales)	750,000
Gross profits	$540,000
Less: Operating expense:
Fixed expense	36,000
Variable expense (6% sales)	90,000
Operating profits	$414,000
Less: Interest expense
Net profits before taxes	$379,000
Less: Taxes (40% NPBT)	151,600
Net profits after taxes	$227,400
Less: Cash dividends	70,000
To retained earnings	$157,400

Reference

Trankle, U.G., & Gelau, C. (1992). Maximization of subjective expected utility or risk control, experimental tests of risk homeostasis theory. Ergonomics, 35(1), 723.

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Allen Products Inc and Metroline Manufacturing: Income Statements

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