[kadley1]

Question is: explain what you would have to do to project profits using the traditional format if sales were to increase 20%?
My answer: under traditional income statement, you would not be able to because certain costs, such as administrative expense, production cost, and selling costs, are buried in the cost of goods, thereby making if difficult to determine projected profits if sales were to increase by 20%.

I am not sure if this is the correct response to this question or not. My textbook is not clear, and I can't seem to find any other information that may explain this more clearly, so I am assuming that with a traditional income statement, that such projections would not be possible.

[ArcSine]

You're on the trail; just need to fill it out a bit. A contribution P&L clearly shows the costs that are variable, and those that are fixed. The variable costs are expected to remain in a fairly constant proportion to Sales. If Sales are expected to change by X%, then so too will the variable costs. The fixed costs, OTOH, will remain, well, fixed.

By knowing whether each cost in the current P&L is fixed, or is a constant percentage of Sales (i.e. variable), it would be easy to project next year's P&L if you've given that Sales will change by X%.

On a traditional income statement, though, deciding which costs are fixed and which are variable is guesswork at best, and impossible (when, as you suggest, multiple cost items are rolled up into single totals with no transparency) at worst.