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Show all calculations Use the following financial data to answer the questions below
Show all calculations Use the following financial data to answer the questions below. Sales $295,000 COGS $129,800 Operating expenses $73,500 Interest expense $18,000 Tax rate 30% Sales increase predicted $348,000 DOL 1.25 DFL 1.15 1. Calculate the EBIT and net income for the period (4 pts) 2. Calculate the percentage change in EBIT expected for the next period (2 pts) 3. What percentage change in net income is predicted? (2 pts) 4. What $ amount of net income is predicted for the next period? (2 pts)
Expert Solution
Answer 1.
EBIT = Sales - Cost of Goods Sold - Operating Expenses
EBIT = $295,000 - $129,800 - $73,500
EBIT = $91,700
Taxable Income = EBIT - Interest Expense
Taxable Income = $91,700 - $18,000
Taxable Income = $73,700
Net Income = Taxable Income * (1 - Tax Rate)
Net Income = $73,700 * (1 - 0.30)
Net Income = $51,590
Answer 2.
% Change in Sales = Increase in Sales / Old Sales
% Change in Sales = $348,000 / $295,000
% Change in Sales = 1.1797 or 117.97%
Degree of Operating Leverage = % Change in EBIT / % Change in Sales
1.25 = % Change in EBIT / 117.97%
% Change in EBIT = 147.46%
Answer 3.
Degree of Combined Leverage = Degree of Operating Leverage * Degree of Financial Leverage
Degree of Combined Leverage = 1.25 * 1.15
Degree of Combined Leverage = 1.4375
Degree of Combined Leverage = % Change in Net Income / % Change in Sales
1.4375 = % Change in Net Income / 117.97%
% Change in Net Income = 169.58%
Answer 4.
Increase in Net Income = Old Net Income * % Change in Net Income
Increase in Net Income = $51,590 * 169.58%
Increase in Net Income = $87,486.32
New Net Income = Old Net Income + Increase in Net Income
New Net Income = $51,590 + $87,486.32
New Net Income = $139,076.32
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