Question
You have developed the following pro forma income statement for your corporation. Sales $ 45,689,000 Variable costs (22,743,000) Revenue before fixed costs $ 22,946,000 Fixed
You have developed the following pro forma income statement for your corporation.
| Sales | $ | 45,689,000 |
| Variable costs | (22,743,000) | |
| Revenue before fixed costs | $ | 22,946,000 |
| Fixed costs | (9,221,000) | |
| EBIT | $ | 13,725,000 |
| Interest expense | (1,266,000) | |
| Earnings before taxes | $ | 12,459,000 |
| Taxes (50%) | (6,229,500) | |
| Net income | $ | 6,229,500 |
It represents the most recent years operations, which ended yesterday. Your supervisor in the controllers office has just handed you a memorandum asking for written responses to the following questions:
a. If Sales Should increase by 25%, by what percent would earnings before interest and taxes and net income increase?
b. If sales should decrease by 25% by what percent would earnings before interest and taxes and net income decrease?
c. If the firm were to reduce its reliance on debt financing such that interest expense were cut in half, how would this affect your answers to parts A and B?
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