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 45764000) (variable costs 2285400) a. If sales should increase by 30 percent. by what percent would earnings before interest and taxes and net income increase? b. If sales should decrease by 30 percent, 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?

Revenue 22,910,000

Fixed costs (9,300,000)

EBIT 13610000

Interest expense (1298000)

Earning before taxes 12312000

Taxes 50% (6156000)

Net Income 6156000

Explanation / Answer

a. If sales increases by 30%, EBIT goes up by 20,483,000 - 13,610,000/13,610,000 x 100 = 50.50%

Net income goes up by 9,592,500-6,156,000/6,156,000 x 100= 55.82%

b. If sales decreases by 30%, EBIT decreases by 13610000- 6737000/13610000 x100 = 50.50% and net in come decreases by 6,156,000-2,719,500/6,156,000 x100 =55.82 %

a b c.a c.b Sales 59,493,200 32,034,800 59,493,200 32,034,800 Variable Cost 29,710,200 15,997,800 29,710,200 15,997,800 Contribution Margin 29,783,000 16,037,000 29,783,000 16,037,000 Fixed Cost 9,300,000 9,300,000 9,300,000 9,300,000 EBIT 20,483,000 6,737,000 20,483,000 6,737,000 Interest Expense 1,298,000 1,298,000 649,000 649,000 EBT 19,185,000 5,439,000 19,834,000 6,088,000 Tax @ 50% 9,592,500 2,719,500 9,917,000 3,044,000 Net Income 9,592,500 2,719,500 9,917,000 3,044,000

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