Question
Genatron wants to estimate what will happen to its income before interest and taxes if its net sales change from the 2017 level of $1,500,000.
Genatron wants to estimate what will happen to its income before interest and taxes if its net sales change from the 2017 level of $1,500,000. Refer to Genatron's 2017 income statement, 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.
Net Income: $114,000
Sales: $1,500,000
Total Assets: $1,200,000
Equity: $470,000
Current Assets: $800,000
Current Liabilities: $330,000
Inventory: $500,000
AR: $260,000
COGS: $900,000
a. 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.
b. Determine the percentage change in income before interest and taxes given your calculations in Part a, and determine the degree of operating leverage.
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