Martin Inc. is considering the addition of a new line of organic fertilizer. It
ID: 2750979 • Letter: M
Question
Martin Inc. is considering the addition of a new line of organic fertilizer. It is expected that each application of fertilizer will sell for $15.50 and the variable operating cost per application will be $8.00. Total fixed operating costs are expected to be $40,000. The company has a 30% marginal tax rate, and will have interest expense associated with this line of $12,000. Martin expects to sell 10,000 applications in the first year. a. Put together the complete income statement for the organic fertilizer line’s first year. Is the line expected to be profitable? b. Calculate the operating break-even point in both units and dollars. c. How many applications would Martin need to sell to earn a target EBIT of $40,000? d. What is the DOL, DFL & DCL for this year? e. If sales are expected to increase by 10% next year, show the proforma Income Statement.
Explanation / Answer
Answer 1 :
Yes This line is profitable as shown in above calculation.
Answer - 2 :
At 6934 unit or $ 107477 sale we find almost Net income of the company is ZERO. Break Even point in Unit will be 6934 unit and in dollar will be $ 107477
Answer - C
Total 10667 unit will be sale to acheive the target of 40000 EBIT.
Answer (D) DOL = Contribution Margin/Operating profit = 80002.50/40002.50 = 1.999= 2.0
DFL = Opertaing profit/Profit before tax
= 40002.50/28002.50
= 1.428 = 1.43
DCl = DFL * DOL
= 1.43*2
= 2.86
Answer (E) = IF Sales are increae 10 %, Income statement
Particulars Amount Amount/Unit Sales in Unit 10000 Sale price per unit 15.50 155000 Less Variable cost 8.00 80000 Gross Profit 75000 Fixed cost 40000 EBIT 35000 Interest Exp. 12000 EBT 23000 TAX @ 30% 6900 NET INCOME 16100Related Questions
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