The following forecasted variable costing income statement was prepared for Martin Company:
Sales
$100,000
Variable costs
45,000
Contribution margin
$55,000
Fixed costs
25,000
Net income
$30,000
The president of Martin knows there is uncertainty associated with all of these estimates. Currently, the pro forma statement represents the most likely outcome. The president, however, wants to conduct a sensitivity analysis to examine the worst case and best cases scenarios as well. After consultation with his managers, the following additional information was determined:
• The worst case and best case scenarios for sales represent a +/- change of 25% of the most likely levels.
• The worst case and best case scenarios for fixed costs represent a +/- change of 20% of the most likely levels.
• Variable costs are always proportional to sales. The worst case for the behaviour of variable costs is they climb to 60% of sales. The best case scenario for variable costs is they fall to 40% of sales.
Required:
Calculate the operating income for Martin Company using all variables at their worst case levels.
Repeat this process and calculate the net income with all variables assuming their best case levels. How likely do you think these ends points are?
