HW7-1 (20 POINTS) Repeat the Spuds and Suds Income Statement example from Chapter 7 with the following assumptions: price per unit and fixed costs are expected to increase by an average annual rate of inflation of 2%. Also assume that variable costs as a percent of sales will remain constant at 65%. Finally, suppose that Spuds and Suds is a firm in the early stage of business, and that unit sales are projected to grow at a rate of 20%, 15%, 10% and 5% for 2020-2024 respectively. a) Create an income statement using the assumptions explained above. (Analysis 4 pts) b) Calculate the operating break-even point in both units and dollars. (Analysis 4 pts) c) How many units would Spuds and Suds need to sell in order to achieve earnings, before interest and taxes of $900,000? (Identify and Access Needed Information 4 pts) d) Calculate the degree of operating, financial, and combined leverage for each year. (Use Information Effectively to Accomplish a Specific Purpose 4 pts) e) Create a chart that shows how the various leverage measures have changed over this five-year period. (Use Information Effectively to Accomplish a Specific Purpose 4 pts) 2023* 2024* Spuds and Suds Income Statement For the Year Ended Dec. 31, 2020 2020 2021* 2022* Sales $2,500,000 Less: Variable Costs 1,500,000 Less: Fixed Costs 400,000 Earnings Before Interest and Taxes 600,000 Less: Interest Expense 100,000 Earnings Before Taxes 500,000 Taxes 125,000 Net Income 375,000 Less: Preferred Dividends Net Income Available to Common Common Shares Outstanding Earnings per Share 100,000 275,000 1,000,000 $ 0.28 Price per Unit Unit Sales Target EBIT Variable Costs as a % of Sales Projected Unit Sales Growth Inflation Rate Tax Rate Assumptions $ 16.00 156,250 $ 800,000 65.00% 25% Break-even Point (Units) Break-even Point (Dollars) Units to Meet EBIT Target %Change in Sales from Prior Year %Change in EBIT from Prior Year %Change in EPS from Prior Year 2020 2022* 2023* 2024* 2021* #N/A Degree of Operating Leverage Degree of Financial Leverage Degree of Combined Leverage
