You have developed the following pro forma income statement for your corporation

Question

You have developed the following pro forma income statement for your corporation.

It represents the most recent years operations, which ended yesterday. Your supervisor in the controllers office has just handed you a memorandum asking for written responses to the following questions:

a. If Sales Should increase by 25%, by what percent would earnings before interest and taxes and net income increase?

b. If sales should decrease by 25% by what percent would earnings before interest and taxes and net income decrease?

c. If the firm were to reduce its reliance on debt financing such that interest expense were cut in half, how would this affect your answers to parts A and B?

Sales $ 45,689,000 Variable costs (22,743,000) Revenue before fixed costs $ 22,946,000 Fixed costs (9,221,000) EBIT $ 13,725,000 Interest expense (1,266,000) Earnings before taxes $ 12,459,000 Taxes (50%) (6,229,500) Net income $ 6,229,500

Explanation / Answer

2. if sales decreased by 25% then the changes in following is :

the sales value after decrese= $34,266,750

less- variable cost= $ 17,057,250

less- fixed cost= $9,221,000

EBIT= $ 7,988,500

the change is = (less $5,736,500)

deduct interest expenditure= $1,266,000

earning before tax= $6,722,500

tax= $3,361,250

net income is $3,361,250

1. if sales increased by 25%, then

the change in EBIT is around $1,715,625 (increase)

the change in net income increase is $155,737.5

3. if the interest expense is declined by 50% then,

the EBT in second case is $7,355,500

Related Questions

Navigate

• Browse (All)
• Browse Y
• Subjects

---

---

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.