1. Imagine that you were hired recently as a financial analyst for a relatively new, highly leveraged ski manufacturer located in the foothills of Colorados Rocky Mountains. Your firm manufactures only one product, a state-of-the-art ski. The company has been operating up to this point without much quantitative knowledge of the business and financial risks it faces.

Ski season just ended, however, so the president of the company has started to focus more on the financial aspects of managing the business. He has set up a meeting for next week with the CFO, Maria Sanchez, to discuss matters such as the business and financial risks faced by the company. Accordingly, Maria has asked you to prepare an analysis to assist her in her discussions with the president.

As a first step in your work, you compiled the following information regarding the cost structure of the company:

Output level	8,0000 units
Operating assets	$4,000,000
Operating asset turnover	8 times
Return on operating assets	32%
Degree of operating leverage	6 times
Interest expense	$600,000
Tax rate	35%

As the next step, you need to determine the break-even point in units of output for the company. One of your strong points has been that you always prepare supporting work papers, which show how you arrived at your conclusions. You know Maria would like to see these work papers to facilitate her review of your work. Therefore, you will have the information you require to prepare an analytical income statement for the company. You are sure that Maria would also like to see this statement. In addition, you know that you need it to be able to answer the following questions. You also know that Maria expects you to prepare, in a format that is presentable to the president, answers to the following questions to serve as a basis for her discussions with the president.

a. What is the firms break-even point in sales dollars?

b. If sales should increase by 30 percent (as the president expects), by what percentage would EBT (earnings before taxes) and net income increase?

c. Prepare another income statement, this time to verify the calculations from part b.

2. Camping USA Inc. has only been operating for 2 years in the outskirts of Albuquerque, New Mexico, and is a new manufacturer of a top-of-the-line camping tent. You are starting an internship as assistant to the chief financial officer of the company, and the owner and CEO, Tom Charles, has decided that this is the right time to know more about the business and financial risks his company must deal with. For this, the CFO has asked you to prepare an analysis to support him his next meeting with Tom Charles a week from today.

To make the required calculations, you have to put together the following data regarding the cost structure of the company:

Output level	120000 units
Operating assets	$6,000,000
Operating asset turnover	12 times
Return on operating assets	48%
Degree of operating leverage	10 times
Interest expense	$720,000
Tax rate	42%

The CFO has instructed you to first determine the break-even point in units of output for the company. He requires that you prepare supporting documents, which demonstrate how you arrived at your conclusion and can facilitate his review of your work. Accordingly, you are required to have the information needed to prepare an analytical income statement for the company to be presented to the CFO. In a format that is acceptable for a meeting discussion with the CEO, you also need to prepare answers to the following questions:

a. What is the firms break-even point in sales dollars?

b. If sales should increase by 40 percent, by what percentage would EBT (earnings before taxes) and net income increase?

c. Prepare another income statement, this time to verify the calculations from part b.