Table 1

Assumptions for Revised Pro Forma Income Statement

1. Sales will remain constant at 1,000,000 units at $30 per unit.

2. Fixed costs will increase from $2,000,000 to $5,800,000, a gain of $3,800,000. (Depreciation expense will be $2,800,000 and this will be shown as a footnote in the 2009 pro forma income statement).

3. Variable cost per unit will be reduced from $25 to $18.80. A total of 1,000,000 units will still be sold. The reduction in variable costs per unit is a direct result of the increased fixed costs and the associated automation.

4. Interest expense will reflect that there is now $12 million in long-term debt in the form of bonds payable at 10.75%. Ten million dollars of new debt is being added to $2 million of old debt.

GENUINE MOTOR PRODUCTS

Pro Forma Income Statement

For 2009

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, up above, the original pro forma income statement for 2009 and the assumptions in Table 1. The new statement you are developing below will be referred to as Figure 4 for purposes for reference.

GENUINE MOTOR PRODUCTS

Revised Pro forma Income Statement

For 2009

Sales (1,000,000 units @ $30 per unit)...............................$30,000,000

-Fixed costs*............................................................................5,800,000

-Total variable costs (1,000,000 units @ $18.80 per unit

Operating income (EBIT).............................................................

-Interest (10.75% x $12,000,000)................................................

Earnings before taxes.................................................................

-Taxes (35%)..............................................................................

Earnings after taxes....................................................................

Shares.........................................................................................2,320,000

Earnings per share.......................................................................$ 1.15

*Fixed costs include $2,800,000 in dpreciation

7. Finally, assume sales volume reaches 1,500,000 units after Mike Anton's changes are put into place. What will the new figure be for earninghs per share? Under the old plan, earnings per share at 1,500,000 units would be $1.72.

Sales (1,500,000 units @ $30 per unit)...........................................$45,000,000

-Fixed costs.........................................................................................5,800,000

-Total variable costs (1,500,000 units @ $18.80 per unit)

Operating income.................................................................................

-Interest (10.75% x $12,000,000).........................................................

Earnings before taxes.........................................................................

-Taxes (35%)......................................................................................

Earnings after taxes............................................................................

Shares............................................................................................... 2,320,000

Earnings per share.............................................................................

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 likelfy to be the key variable in determining the success or failure of the new plan?

Please compute this asap.

Thank you