The Alexander Company reported the following income statement for 2010:

Assume that all depreciation and 75 percent of the firm’s general, administrative, and selling expenses are fixed costs and that the remainder of the firm’s operating expenses are variable costs.

a. Determine Alexander’s fixed costs, variable costs, and variable cost ratio.

b. Based on its 2010 sales, calculate the following for the firm:
•i. DOL •ii. DFL •iii. DCL

c. Assume that next year’s sales increase by 15 percent, that fixed operating and financial costs remain constant, and that the variable cost ratio and tax rate also remain constant. Use the leverage figures just calculated to forecast next year’s EPS.

d. Show the validity of this forecast by constructing Alexander’s income statement for next year according to the revised format. P-9687