. The AIR Company sells file cabinets. The selling price is $2850 each. Labor an

Question

. The AIR Company sells file cabinets. The selling price is $2850 each. Labor and material cost $1500 per unit. Outstanding debt is $5,000,000 at an average cost of 10%. The dividend payout ratio is 40% of net income. The tax rate is 40%. The depreciation expense last year was $250,000. Outstanding equity is $3,000,000. 1) Last year 1000 file cabinets were sold. Prepare the income statement 2) Using the appropriate income from part 18.a, what is the resulting % return on equity? 3) How many units need to be sold to earn at 15% return on equity?

Explanation / Answer

Answer 1. AIR Company Income Statement Sale of Cabinets - 1000 Nos X $2850          2,850,000 Less: labor & Material Costs - 1000 Nos X $1500        (1,500,000) Gross Margin          1,350,000 Less: Dep. Exp.           (250,000) Operating Profits          1,100,000 Less: Interest Cost - $5,000,000 x 10%              500,000 Net Income before Tax              600,000 Less: Income Tax - 40%              240,000 Net Income              360,000 Answer 2. Return on equity = 360,000 / 3,000,000 = 12% Answer 3. Gross Profit Per Unit = $2850 - $1500 = $1350 Net Income - 3,000,000 X 15%              450,000 Add: Income Tax - 40%              300,000 Net Income before Tax              750,000 Add: Interest Cost              500,000 Operating Profits          1,250,000 Add: Dep.              250,000 Gross Margin          1,500,000 No. of Cabinets Sold - 1,500,000 / 1350                  1,111

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