Drill 22 ·
Projected Income Statement Drill 22 is a practice drill. It contains 5 original questions created by Brian Stewart, a Barron's test prep author with over 20 years of tutoring experience.
A SaaS company projects next year's income statement from a base year plus stated assumptions; uses an invented company and original figures.
Veraclae Software sells a subscription project-management tool. The owner is building a projected income statement for 2026 from the 2025 results below, using three planning assumptions: (1) revenue grows 25 percent, (2) cost of goods sold stays at 25 percent of revenue, and (3) operating expenses stay flat in dollars. All figures are in dollars; round to the nearest dollar.
Veraclae Software: 2025 Income Statement and 2026 Projection Inputs
| Item | Amount |
|---|---|
| Revenue (2025) | 800,000 |
| Cost of goods sold (2025) | 200,000 |
| Gross profit (2025) | 600,000 |
| Operating expenses (2025) | 360,000 |
| Operating profit (2025) | 240,000 |
| Assumption 1: revenue growth | +25% |
| Assumption 2: COGS as % of revenue | 25% |
| Assumption 3: operating expenses | flat (unchanged) |
Question 1. Applying assumption 1, what is Veraclae's projected 2026 revenue?
Explanation: Q1: Projected revenue. The answer is 1,000,000. Assumption 1 raises 2025 revenue of 800,000 by 25 percent: 800,000 x 1.25 = 1,000,000. 750,000 would be a 25 percent cut, not a 25 percent increase. 825,000 mistakenly adds only about 3 percent. 960,000 applies 20 percent, not 25 percent.
Question 2. In the projection, cost of goods sold is treated as a cost that rises and falls with revenue rather than staying fixed. This kind of cost is best described as a:
Explanation: Q2: Concept. The answer is a variable cost. Assumption 2 ties COGS to revenue (always 25 percent of it), so the dollar amount changes as revenue changes, which is the definition of a variable cost. A fixed cost would stay the same in dollars regardless of revenue, which is how operating expenses are treated here, not COGS. A sunk cost is a past cost that cannot be recovered. An opportunity cost is the value of the next-best alternative given up.
Question 3. Using all three assumptions, what is Veraclae's projected 2026 operating profit?
Explanation: Q3: Calculation. The answer is 390,000. Projected revenue is 1,000,000; COGS at 25 percent is 250,000, so gross profit is 750,000; operating expenses stay flat at 360,000, leaving operating profit of 750,000 - 360,000 = 390,000. 240,000 is the 2025 operating profit, before the projection. 360,000 is the operating-expense line, not the profit. 440,000 holds COGS at the old 200,000 dollar figure instead of recomputing it as 25 percent of 2026 revenue (1,000,000 - 200,000 - 360,000 = 440,000).
Question 4. Veraclae's projected 2026 operating profit margin (operating profit divided by revenue) is closest to:
Explanation: Q4: Calculation. The answer is 39.0 percent. Operating profit of 390,000 divided by revenue of 1,000,000 equals 0.39, or 39.0 percent. 30.0 percent is the 2025 margin (240,000 / 800,000), before the projected improvement. 25.0 percent is the COGS rate, not a profit margin. 75.0 percent is the projected gross margin (750,000 / 1,000,000), which is computed before operating expenses.
Question 5. The owner notes that operating profit is projected to rise much faster than revenue. Which feature of the assumptions best explains why?
Explanation: Q5: Why-reasoning. The answer is that operating expenses were held flat while revenue grew, so more of each new sales dollar reaches profit. Because the fixed operating expenses do not rise with revenue, the extra gross profit from higher sales flows through to operating profit, which is why profit (up 62.5 percent) grows faster than revenue (up 25 percent). The first choice is wrong because costs were not all grown at the revenue rate: operating expenses were held flat. The second is wrong because COGS stays at a constant 25 percent of revenue, so the gross margin does not change. The third is wrong because operating expenses remain at 360,000, not zero.