Imagine that you were hired recently as a financial analyst for a relatively new, highly leveraged ski manufacturer located in the foothills of Colorado's Rocky Mountains. Your firm manufactures only one product, a state-of-the-art snow ski. Up to this point the company has been operating without much quantitative knowledge of the business and financial risks it faces.

Ski season just ended, however, so the president of the company has started to focus more on the financial aspects of managing the business. He has set up a meeting for next week with the CFO, Maria Sanchez, to discuss matters such as the business and financial risks faced by the company.

Accordingly, Maria has asked you to prepare an analysis to assist her in her discussions with the president. As a first step in your work, you compiled the information in the popup window,

regarding the cost structure of the company:

As the next step, you need to determine the break-even point in units of output for the company. One of your strong points has been that you always prepare supporting work papers that show how you arrived at your conclusions. You know Maria would like to see these work papers to facilitate her review of your work. Therefore, you will have the information you require to prepare an analytical income statement for the company. You are sure that Maria would also like to see this statement. In addition, you know that you need it to be able to answer the following questions. You also know Maria expects you to prepare, in a format that is presentable to the president, answers to the following questions to serve as a basis for her discussions with the president.

a. What is the firm's break-even point in sales dollars?

b. If sales should increase by 20 percent (as the president expects), by what percentage would EBT (earnings before taxes) and net income increase?

c. Prepare another income statement, this time to verify the calculations from part (b ).

s EBIT? 1 Data Table at are the Output level Operating assets Operating asset turnover Return on operating assets Degree of operating leverage Interest expense 78,000 units $3,000,000 6 times 31% 6 times $580,000 39% items to the Tax rate (Click on the icon located on the top-right comer of the data table above in order to copy its contents into a spreadsheet.) Print Done e. Prepare another income statement, this time to verify the calculations from part (b) dbl lenings before taxes) and net income increase? ment this hme to vertyion from part a) a. Before you can compute the fim' s break-even point in sales dollars, you need to compute some items on the firm's income statement. assets are $3,000,000 and the operating asset turnover is 6 times. What are the firm's sales revenues? (Round to the nearest dolar.) The firm's operating assets are $3,000,000 and the return on operating assets is 31%. What is the firm's EBIT? (Round to the nearest dollar.) Given the degree of operating leverage of 6 times the sales and EBIT computed in previous steps, what are the fim's total variable costs? (Round to the nearest dollar.) Based on the computed sales, EBIT, and variable costs, what are the frm's total fixed costs? (Round to the nearest dollar.) Compute the EBT, taxes, and net income to complete the following income statement. (Round up all tems to the nearest dollar.) Sales revenues $18,000,000 Less: Variable costs 12,420,000 Less: Fixed costs 4,650,000 Equals: EBIT S 930,000 Less: Interest expense Equals: EBT 580,000 Equals: Net income What is the firm's break-even point in sales dollars? SL (Round to the nearest dollar.) b. If sales should increase by 20 percent (as the president expects), by what percentage would EBT (eamings before taxes) and net income increase? % (Round to the nearest whole percent.) Enter any number in the edit fields and then continue to the next question. Less: Taxes (39%) [ Equals: Net income What is the firm's break-even point in sales dollars? (Round to the nearest dollar) h. if sales should increase by 20 percent (as the president expects, by what percentage would EBT (eamings before taxes) and net Income increase? % (Round to the nearest whole percent.) C. Prepare another income statement to verify the calculations from part (b). If sales should increase by 20 percent, what will the forecast level of sales revenues be? $ (Round to the nearest dollar.) Since varlable costs will also increase by 20 percent, what is the forecast level of variable costs? (Round to the nearest dollar.) Complete the following income statoment after the increase in sales. (Round up all tems to the nearest dollar.) Sales revenues $21,600,000 Less: Variable costs 14,904,000 Less: Fixed costs 4,650,000 Equals: EBIT Less: Interest expense Equals: EBT Less: Taxes (39%) 580,000 Equals: Net income Using the EBT from the two income statements, what is the percentage change in the EBT? [1% (Round to the nearest whole percent.) Enter any number in the edit fields and then continue to the next