Shown here are condensed income statements for two different companies (both are

Question

Shown here are condensed income statements for two different companies (both are organized as LLCs and pay no income taxes).

Ace Company
Sales $500,000
Variable expenses (80%) 400,000
Income before interest 100,000
Interest expense (fixed) 30,000
Net income $70,000


Deuce Company
Sales $500,000
Variable expenses (60%) 300,000
Income before interest 200,000
Interest expense (fixed) 130,000
Net income $ 70,000

(state whether it increases or decreases and by what % for each company)

What happens to each company's net income if sales decrease by 20%? (Round your answers to the nearest percentage. Omit the "%" sign in your response.)


Ace Co.- ?
Deuce Co.- ?

Explanation / Answer

Ace Company Sales $500,000. So new Sales = 0.60*500,000 = $300,000 Less Variable expenses (80%) 240,000 ----------------------------------------------- Income before interest 60,000 Less Interest expense (fixed) 30,000 Net income $30,000 .............................Ans (1) So Net Income decreased from 70000 to 30,000 ie an decrease of (30000-70000)/70000 = -57.14% Deuce Company Sales $500,000 So new Sales = 0.60*500,000 = $300,000 Less Variable expenses (60%) 180,000 ----------------------------------------------- Income before interest 120,000 Less Interest expense (fixed) 130,000 ------------------------------------------------ Net income -$10,000 ..........................Ans (2) So Net Income decreased from 70000 to -10,000 ie an decrease of (-10000-70000)/70000 = -114.29%

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