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:

Sales $45,682,000

Variable Costs (22,783,000)

Revenue before fixed costs 22,899,000

Fixed costs (9,154,000)

EBIT 13,745,000

Interest expense (1,310,000)

Earnings before taxes 12,435,000

Taxes (50%) (6,217,500)

Net Income 6,217,500

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 increase? What percent would net income increase? (Round to two decimal points)

B.) If sales should decrease by 25%, by what percent would earnings before interest and taxes decrease? What percent would net income decrease? (Round to two decimal points)

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?

Explanation / Answer

Statement showing EAT Particulars Amount Sales inc by 25% % Increase Sales decrease by 25% % Deccrease Sales             45,682,000.00            57,102,500.00                     34,261,500.00 VC             22,783,000.00            28,478,750.00                     17,087,250.00 Cont'n             22,899,000.00            28,623,750.00                     17,174,250.00 Fixed Costs               9,154,000.00              9,154,000.00                       9,154,000.00 EBIT             13,745,000.00            19,469,750.00 41.65%                       8,020,250.00 -41.65% Interest Expense               1,310,000.00              1,310,000.00                       1,310,000.00 EBT             12,435,000.00            18,159,750.00                       6,710,250.00 Taxes@50%               6,217,500.00              9,079,875.00                       3,355,125.00 EAT               6,217,500.00              9,079,875.00 46.04%                       3,355,125.00 -46.04% If interest exp were cut in half Statement showing EAT Particulars Amount Sales inc by 25% % Increase Sales decrease by 25% % Deccrease Sales             45,682,000.00            57,102,500.00                     34,261,500.00 VC             22,783,000.00            28,478,750.00                     17,087,250.00 Cont'n             22,899,000.00            28,623,750.00                     17,174,250.00 Fixed Costs               9,154,000.00              9,154,000.00                       9,154,000.00 EBIT             13,745,000.00            19,469,750.00 41.65%                       8,020,250.00 -41.65% Interest Expense                   655,000.00                  655,000.00                           655,000.00 EBT             13,090,000.00            18,814,750.00                       7,365,250.00 Taxes@50%               6,545,000.00              9,407,375.00                       3,682,625.00 EAT               6,545,000.00              9,407,375.00 43.73%                       3,682,625.00 -43.73%

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