Camping USA Inc. has been operating for only 2 years in the outskirts of Alburquerque, 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 in his next meeting with Tom Charles a week from today

To make the required calculations, you have put together the following data regarding the cost structure in the popup window

• Output level 150,000 units
• Operating assets $5,000,000
• Operating asset turnover 10 times
• Return on operating assets 47%
• Degree of operating leverage 9 times
• Interest expense. $620,000
• Marginal tax rate. 21%

The CFO has instructed you to determine the break-even point in units of output for the company. He requires that you prepare supporting documents that 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 a pro forma income statement for the company to be presented to the CFO. In a format that is acceptable for a meeting discussion with the CFO, 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 and net income increase?

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

a. Before you can compute the firm's break-even point in sales dollars, you need to compute some items on the firms income statement.

• The firms operating assets are $5,000,000 and the operating asset turnover is 10 times. What are the firms sales revenues? (round to nearest dollar)

• The firms operating assets are $5,000,000 and the return on operating assets is 47%. What is the firms EBIT? (round to nearest dollar)

• Given the degree of operating leverage of 9 times the sales and EBIT computed in previous steps, what are the firms total variable cost? (round to nearest dollar)
• Based on the computed sales, EBIT, and variable costs, what are the firms total fixed costs? (round to nearest dollar)

Compute the EBT, taxes, and net income to complete the following income statement

Sales revenues. $50,000,000

Less: Variable costs. 28,850,000

Less: Fixed costs. 18,800,000

Equals: EBIT $2,350,000

Less: Interest expense 620,000

Equals: EBT. ________

Less: Taxes (21%). ________

Equals: Net income. __________

What is the firms break-even point in sales dollars? (round to nearest dollar)

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

C. Prepare another income statement to verify the calculations from part b. If sales should increase by 40percent, what will the forecast level of sales revenues be?

• Since variable costs will also increase by 40 percent, what is the forecast level of variable costs?

Sales revenues. $70,000,000

Less: Variable costs. 40,390,000

Less: Fixed costs. 18,800,000

Equals: EBIT ________

Less: Interest expense 620,000

Equals: EBT. ________

Less: Taxes (21%). ________

Equals: Net income. __________

Using the EBT from the two income statements, what is the percentage change in the EBT?