Sales $ 45,784,000 Variable costs (22,785,000) Revenue before fixed costs $ 22,9

Question

Sales

$

45,784,000

Variable costs

(22,785,000)

Revenue before fixed costs

$

22,999,000

Fixed costs

(9,156,000)

EBIT

$

13,843,000

Interest expense

(1,302,000)

Earnings before taxes

$

12,541,000

Taxes (50%)

(6,270,500)

6,270,500

You have developed the following pro forma income statement for your corporation: It represents the most recent year's operations, which ended yesterday. Your supervisor in the controller's office has just handed you a memorandum asking for written responses to the following questions:                                        

AIf sales should increase by

20 percent, by what percent would earnings before interest and taxes and net income increase?

b.If sales should decrease by

20 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?

Sales

$

45,784,000

Variable costs

(22,785,000)

Revenue before fixed costs

$

22,999,000

Fixed costs

(9,156,000)

EBIT

$

13,843,000

Interest expense

(1,302,000)

Earnings before taxes

$

12,541,000

Taxes (50%)

(6,270,500)

6,270,500

You have developed the following pro forma income statement for your corporation: It represents the most recent year's operations, which ended yesterday. Your supervisor in the controller's office has just handed you a memorandum asking for written responses to the following questions:                                        

AIf sales should increase by

20 percent, by what percent would earnings before interest and taxes and net income increase?

b.If sales should decrease by

20 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?

Explanation / Answer

a) Sales increase by 20% Existing sales increase 20% Increase/ decrease Sales 45784000 54940800 9156800 Variable cost -22785000 -27342000 -4557000 (increase by 20%) Revenue before fixed cost 22999000 27598800 4599800 Fixed cost -9156000 -9156000 0 EBIT 13843000 18442800 4599800 Interest expense -1302000 -1302000 0 Earnings before taxes 12541000 17140800 4599800 Taxes @ 50% -6270500 -8570400 -2299900 Net Income 6270500 8570400 2299900 EBIT increase by = 4599800/13843000 * 100                                    = 33.23% Net income increases by = 2299900 / 6270500 * 100                                                    = 36.68% b) Sales decrease by 20% Existing sales decrease 20% Increase/ decrease Sales 45784000 36627200 -9156800 Variable cost -22785000 -18228000 4557000 (increase by 20%) Revenue before fixed cost 22999000 18399200 -4599800 Fixed cost -9156000 -9156000 0 EBIT 13843000 9243200 -4599800 Interest expense -1302000 -1302000 0 Earnings before taxes 12541000 7941200 -4599800 Taxes @ 50% -6270500 -3970600 2299900 Net Income 6270500 3970600 -2299900 EBIT decreases by = 4599800/13843000 * 100                                    = 33.23% Net income decreases by = 2299900 / 6270500 * 100                                                    = 36.68% c) Existing sales increase 20% Increase/ decrease Sales 45784000 54940800 9156800 Variable cost -22785000 -27342000 -4557000 Revenue before fixed cost 22999000 27598800 4599800 Fixed cost -9156000 -9156000 0 EBIT 13843000 18442800 4599800 Interest expense -1302000 -651000 651000 Earnings before taxes 12541000 17791800 5250800 Taxes @ 50% -6270500 -8895900 -2625400 Net Income 6270500 8895900 2625400 EBIT increase by = 4599800/13843000 * 100                                    = 33.23% Net income increases by = 2625400 / 6270500 * 100                                                    = 41.87% Existing sales decrease 20% Increase/ decrease Sales 45784000 36627200 -9156800 Variable cost -22785000 -18228000 4557000 Revenue before fixed cost 22999000 18399200 -4599800 Fixed cost -9156000 -9156000 0 EBIT 13843000 9243200 -4599800 Interest expense -1302000 -651000 651000 Earnings before taxes 12541000 8592200 -3948800 Taxes @ 50% -6270500 -4296100 1974400 Net Income 6270500 4296100 -1974400 EBIT decreases by = 4599800/13843000 * 100                                    = 33.23% Net income decreases by = 1974400 / 6270500 * 100                                                    = 31.49%

Related Questions

Navigate

• Browse (All)
• Browse S
• Subjects

---

---

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