You have developed the following pro forma income statement for yourcorporation. It represents the most recentyear's operations, which ended yesterday. Your supervisor in thecontroller's office has just handed you a memorandum asking for written responses to the followingquestions:

a.If sales should increase by 25 percent, by what percent would earnings before interest and taxes and net incomeincrease?

b.If sales should decrease by 25 percent, by what percent would earnings before interest and taxes and net incomedecrease?

c.If the firm were to reduce its reliance on debt financing such that interest expense were cut inhalf, how would this affect your answers to parts a and b?

Sales

$45,750,000

Variable costs

(22,800,000)

Revenue before fixed costs

$22,950,000

Fixed costs

(9,200,000)

EBIT

$13,750,000

Interest expense

(1,350,000)

Earnings before taxes

$12,400,000

Taxes (50%)

(6,200,000)

Net income

$6,200,000