For 2012, the income statement of Lunchbox Enterprises reported net sales of $27

Question

For 2012, the income statement of Lunchbox Enterprises reported net sales of $27,300, EBIT of $13,450, taxable income of $9,770 and net income of $3,342. The firm paid $456 in dividends. The balance sheet reported current assets of $3,650, net fixed assets of $10,850, current liabilities of $1,920, long-term debt of $3,500, common stock of $7,500 and retained earnings of $1,580. Lunchbox Enterprises is currently operating at 92 percent of capacity. The profit margin and the dividend payout ratio are projected to remain constant. Sales are projected to increase by 4 percent next year. What is the projected addition to retained earnings for next year?

$1,309.60

$1,421.40

$1,884.96

$2,667.74

$3,001.44

$1,309.60

$1,421.40

$1,884.96

$2,667.74

$3,001.44

Explanation / Answer

Profit margin = Net income / Sales = $3,342 /$27,300 = 12.24%

Dividend payout ratio = Dividend paid/Net income = $456/$3,342 = 13.64%

Sales for next year = $27,300 * (1 + 0.04) = $28,392

Net income for next year = $28,392 * 12.24% = $3475.18

Dividend paid = $3,475.18 * 13.64% = $474.01

Addition to retained earnings = Net income – Dividend paid = $3,475.18 - $474.01 = $3,001.17

Hence, Answer is $3,001.44

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