Question

Using the income statement below compute the following items.

Sales	$1,250,000	25
Variable costs	750,000	15
Contribution margin	500,000	10	40%
Fixed operating costs	200,000
Earnings before interest and taxes	300,000
Interest	125,000
Earnings before taxes	175,000
Taxes (30%)	52,500
Net income	$122,500

Note: The company made and sold 50,000 units this year

Required: Record the answers in the designated spots below. Round to the dollar, do not record the dollar sign, and no comma is needed between thousands and hundreds.

1.    Calculate the breakeven point in sales dollars, assume that interest is a fixed cost.

Answer

2.     Assuming they would like to have a minimum of $250,000 in earnings before taxes.

a)    What is the minimum sales amount in dollars that will need to be maintained?

Answer

b)      How many units would they need to sell?  

Answer

3.    a.     Calculate the Degree of Operating Leverage.  Please record TWO decimals.

Answer

b.     Calculate the Degree of Financial Leverage.

Answer

c.     Calculate their Degree of Combined Leverage

Answer

4.     Using the appropriate degree of leverage from above and assuming that sales increase by 25%, compute the new net income in dollars.

Answer

Answer 1

1)812500.

calculation:-

break even point in sales dollar=fixed cost/pv ratio=(200000+125000)/40%=812500.

2) a)1437500.

calculation

let assume the sales needed to maintain 250000 in earning before tax is x,then

particulars		amount($)
sales		x
variable expenses(60%)		.6x
contribution(40%)		.4x
less:fixed expenses		325000
earning before taxes-desired		250000

from the table,we can write as 0.4x-325000=250000 and 0.4x=575000 and x=575000/0.4=1437500.

2b) 57500 units.

calculation

units to be sold=1437500/25=57500 units.

3) a)operating leverage=contribution/earning before interest and tax=500000/300000=1.67 times.

b) financial leverage=earning before interest and taxes/earning before tax=300000/175000=1.71 times.

c) combined leverage=operating leverage x financial leverage=1.67 x 1.71=2.85

4) new net income in dollars=210175

calculation:-

operating leverage=change in EBIT/change in sales

1.67=change in EBIT/25% and change in EBIT=1.67x25%=41.75%

new EBIT=300000+41.75%=425250

EBIT	425250
LESS:interest	125000
EBT	300250
LESS:TAX@30%	90075
Net income	210175