Kane and Abel form a limited company called K&A Ltd to expand their partnership business. K&A Ltd issues shares, debentures, and preference shares to acquire the partnership assets and liabilities. Kane and Abel prepare a budgeted income statement for K&A Ltd's first year that shows an operating profit of $50,000. They calculate investment ratios from the budget to evaluate if their investment in K&A Ltd will be worthwhile. K&A Ltd also manufactures a new product, but the actual profit is less than expected. Kane and Abel ask for an explanation of the differences between the expected and actual profits.