Question

Problem 11-5A Computing and analyzing times interest earned LO A1

[The following information applies to the questions displayed below.]

Shown here are condensed income statements for two different companies (both are organized as LLCs and pay no income taxes).

Miller Company
Sales	$	1,200,000
Variable expenses (80%)		960,000
Income before interest		240,000
Interest expense (fixed)		74,000
Net income	$	166,000

Weaver Company
Sales	$	1,200,000
Variable expenses (60%)		720,000
Income before interest		480,000
Interest expense (fixed)		314,000
Net income	$	166,000

1. Compute times interest earned for Miller Company.

	Times interest earned for Miller Company Choose Numerator: / Choose Denominator: = Times interest earned / = Times interest earned / = 0

2. Compute times interest earned for Weaver Company.

	Times interest earned for Weaver Company Choose Numerator: / Choose Denominator: = Times interest earned / = Times interest earned / = 0

3. What happens to each company's net income if sales increase by 20%. (Round your answers to nearest whole percent.)

	Company Net income Miller Co. % Weaver Co. %

4. What happens to each company's net income if sales increase by 30%? (Round your answers to nearest whole percent.)

	Company Net income Miller Co. % Weaver Co. %

5. What happens to each company's net income if sales increase by 60%? (Round your answers to nearest whole percent.)

	Company Net income Miller Co. % Weaver Co. %

6. What happens to each company's net income if sales decrease by 20%? (Round your answers to nearest whole percent.)

	Company Net income Miller Co. % Weaver Co. %

7. What happens to each company's net income if sales decrease by 30%? (Round your answers to nearest whole percent.)

	Company Net income Miller Co. % Weaver Co. %

8. What happens to each company's net income if sales decrease by 40%? (Round your answers to nearest whole percent.)

	Company Net income Miller Co. % Weaver Co. %

Answer 1

1. Times interest earned= Eaning before interest and Tax expense/Interest expense

Miller Co. = 240000/74000 = 3.24

2. Weaver Co. = 480000/314000 = 1.53

3. Company's net income if sales increase by 20%

	Miller	Weaver
Sales	1440000 (1200000*120%)	1440000 (1200000*120%)
Less : Variable expenses	-1152000 (80% of sales)	-864000 (60% of sales)
Income before interest	288000	576000
Less : Interest expense (fixed)	-74000	-314000
Net Income	214000	262000
Net Income before sales increase	166000	166000
Percentage increase	29 % {(214000-166000)/166000*100}	58% {(262000-166000)/166000*100}

4. Company's net income if sales increase by 30%

	Miller	Weaver
Sales	1560000 (1200000*130%)	1560000 (1200000*130%)
Less : Variable expenses	-1248000 (80% of sales)	-936000 (60% of sales)
Income before interest	312000	624000
Less : Interest expense (fixed)	-74000	-314000
Net Income	238000	310000
Net Income before sales increase	166000	166000
Percentage increase	43 % {(238000-166000)/166000*100}	87% {(310000-166000)/166000*100}

5. Company's net income if sales increase by 60%

Miller	Weaver
Sales	1920000 (1200000*160%)	1920000 (1200000*160%)
Less : Variable expenses	-1536000 (80% of sales)	-1152000 (60% of sales)
Income before interest	384000	768000
Less : Interest expense (fixed)	-74000	-314000
Net Income	310000	454000
Net Income before sales increase	166000	166000
Percentage increase	87 % {(310000-166000)/166000*100}	173% {(454000-166000)/166000*100}

6. company's net income if sales decrease by 20%

Miller	Weaver
Sales	960000 (1200000*80%)	960000 (1200000*80%)
Less : Variable expenses	-768000 (80% of sales)	-576000 (60% of sales)
Income before interest	192000	384000
Less : Interest expense (fixed)	-74000	-314000
Net Income	118000	70000
Net Income before sales decrease	166000	166000
Percentage decrease	29 % {(118000-166000)/166000*100}	58% {(70000-166000)/166000*100}

7.  company's net income if sales decrease by 30%

Miller	Weaver
Sales	840000 (1200000*70%)	840000 (1200000*70%)
Less : Variable expenses	-672000 (80% of sales)	-504000 (60% of sales)
Income before interest	168000	336000
Less : Interest expense (fixed)	-74000	-314000
Net Income	94000	22000
Net Income before sales decrease	166000	166000
Percentage decrease	-43% {(94000-166000)/166000*100}	87% {(22000-166000)/166000*100}

8. company's net income if sales decrease by 40%

Miller	Weaver
Sales	720000 (1200000*60%)	720000 (1200000*60%)
Less : Variable expenses	-576000 (80% of sales)	-432000 (60% of sales)
Income before interest	144000	288000
Less : Interest expense (fixed)	-74000	-314000
Net Income	70000	-26000
Net Income before sales decrease	166000	166000
Percentage decrease	-58% {(70000-166000)/166000*100}	-116% {(-26000-166000)/166000*100}