Genatron wants to estimate what will happen to its income before interest and taxes if its net sales change from the 2012 level of $1,500,000. Refer to Genatrons 2012 income statement below, where the income before interest and taxes is $247,000 (EBT of $190,000 plus Interest of $57,000). Assume that the cost of goods sold are variable expenses and that the other operating expenses are fixed.

Calculate the expected amount of income before interest and taxes for both a 10 percent decrease and a 10 percent increase in net sales for next year.

Income statement 2012 2011 Net sales 1500000 1300000 Cost of goods sold 900000 780000 Gross profit 600000 520000 expenses: general and administrative 150000 150000 marketing 150000 130000 depreciation 53000 40000 interest 57000 45000 earnings before taxes 190000 155000 income taxes 76000 62000 net income 114000 93000

Percent Change Current 2012 10% 10% Net sales 1,500,000 Cost of goods sold(variable expenses) (900,000) Gross profit General & administative (150,000) marketing (15,000) Depreciation (3,000) Income before interest & taxes 247,000

Determine the percentage change in income before interest and taxes given your calculations in Part a, and determine the degree of operating leverage.

percent change in operating income degree of operating leverage