Question: Ace manufacturing Inc., is preparing pro forma financial statements for 2016.
Sales: $2,000,000 Less; Cost of goods sold: $1,200,000 Gross profit: $800000 Less: Selling expense: $200000 General &administrative expense: $60000 Less: Depreciation: $40000 Operating profit: $500000 Less: Interest: $80000 Earnings before taxes: $420000 Less: Taxes(40%): $168000 Net profit after taxes/EACS: $252000
1. If the firm utilizers the percent of sales method to estimate costs for the next year, and projects sales to increase to $2.4 million in 2016 and is in the 40 percent tax rate, what will its net profits be after taxes?
2. If the firm believe that 200000 of the cost of goods sold and 40000 of selling expense are fixed costs, and the interest expense and dividends are not expected to change, what is the projected net profits after taxes?
3. Why is there a difference, and what does this teach you?