FIgure 1

Figure 1
GENUINE MOTOR PRODUCTS
Balance Sheet
As of December 31, 2013
Assets
Current assets.....................................................................					$16,000,000
Fixed assets
Plant and equipment........................................................			$20,000,000
Less: accumulated depreciation....................................			12,000,000
Net plant and equipment..................................................					8,000,000
Total assets........................................................................					$24,000,000
Liabilities and Stockholders Equity
Current liabilities................................................................						10,000,000
Long-term liabilities:
Bonds payable 10.75%....................................................						2,000,000
Total liabilities...................................................................						$12,000,000
Stockholders equity:
Common stock, $1 par value, 2,000,000 shares.................						$2,000,000
Capital in excess of par....................................................						4,000,000
Retained earnings............................................................						6,000,000
Total stockholders equity...................................................						$12,000,000
Total liabilities and stockholders equity..............................						$24,000,000

Figure 2
GENUINE MOTOR PRODUCTS
Pro Forma Income Statement
For 2014
	Sales (1,000,000 units @ $30 per unit).............................			$30,000,000
	Fixed costs*................................................................			2,000,000
	Total variable costs (1,000,000 units @ $25 per unit			25,000,000
	Operating income (EBIT)................................................			$3,000,000
	Interest (10.75% x $2,000,000).....................................			215,000
	Earnings before taxes......................................................			$2,785,000
	Taxes (35%)................................................................			974,750
	Earnings after taxes.........................................................			$1,810,250
	Shares............................................................................			2,000,000
	Earnings per share..........................................................			$ .91
* Fixed costs include$1,000,000 in depreciation

Complete the revised pro forma income statement below. In the process, refer back to Figure 2, the original pro forma income statement for 2014 and the assumptions in Table 1. The new statement you are developing below will be referred to as Figure 4 for purposes of reference.

2. Explain the primary reasons for the change in earnings per share between Figure 2 and Figure 4. 3. To determine the extent the company is more leveraged than it was prior to changes suggested by Mike Anton, compute degree of operating leverage (DOL), degree of financial leverage (DFL), and degree of combined leverage (DCL) both for Figure 2 (before changes) and Figure 4 (after changes). Use equations 53, 55, and 57 from the text.

EQUATIONS :

5-3. DOL = Q ( P-VC) / Q( P-VC)-FC

5-5. DFL= EBIT/EBIT-1

5-7 DCL= Q ( P-VC) / Q( P-VC)-1

4. Using the same financial statements (Figure 2 and Figure 4), compute the breakeven point before and after the changes. Use equation 51 from the text.

EQUATION: BE = fixed costs / contribution margin = fixed costs / price 2 variable cost per unit = fc/ p-vc

5. Assume you use a different measure of break-even analysis. The answer to question 4 tells you the number of units the firm needs to sell to cover fixed costs. Assume you are interested in covering all cash outflows and, furthermore, will use only cash flow numbers rather than accounting numbers. The cash outflows to be covered are (Fixed costs depreciation) plus interest payments.

The formula for the revised break-even (BE) point is:

Apply this formula to Figure 2 to get the revised break-even point before the changes and Figure 4 to get the revised break-even point after the changes. (Note the value for depreciation can be found as a footnote at the bottom of the two figures). 6. Harry Engle suggests that the company could be in trouble if Mike Antons changes are put in place (as reflected in Figure 4) and sales volume is only 300,000 units. Using your revised break-even answers from question 5, do you agree? 7. Finally, assume sales volume reaches 1,500,000 units after Mike Antons changes are put into place. What will the new figure be for earnings per share? Under the old plan, earnings per share at 1,500,000 units would be $1.72.

8. After computing all the numbers in the case, are you inclined to agree with Mike Anton that the changes to automation would be a good idea or Harry Engle, the chief financial officer, that they would not be? What is likely to be the key variable in determining the success or failure of the new plan?