Genatron wants to estimate what will happen to its income before interest and ta

Question

Genatron wants to estimate what will happen to its income before interest and taxes if its net sales change from the 2012 level of $1,500,000. Refer to Genatron’s 2012 income statement below, where the income before interest and taxes is $247,000 (EBT of $190,000 plus Interest of $57,000). Assume that the cost of goods sold are variable expenses and that the other operating expenses are fixed.

Calculate the expected amount of income before interest and taxes for both a 10 percent decrease and a 10 percent increase in net sales for next year.

Income statement 2012 2011
Net sales 1500000 1300000
Cost of goods sold 900000 780000
Gross profit 600000 520000
expenses: general and administrative 150000 150000
marketing 150000 130000
depreciation 53000 40000
interest 57000 45000
earnings before taxes 190000 155000
income taxes 76000 62000
net income 114000 93000

Percent Change
Current 2012 – 10% 10%
Net sales 1,500,000
Cost of goods sold(variable expenses)
   (900,000)
Gross profit
General & administative (150,000)
marketing (15,000)
Depreciation (3,000)
Income before interest & taxes 247,000

Determine the percentage change in income before interest and taxes given your calculations in Part a, and determine the degree of operating leverage.

percent change in operating income
degree of operating leverage

Explanation / Answer

Percent Change                                 Current 2012 ? 10% 10% Net sales                          1,500,000 1,350,000 1,485,000 Cost of goods sold (variable expenses)                             (900,000) 1350000*(9/15) 1485000*(9/15) 810000 891000 Gross profit 600000 540000 594000 General & administrative                            (150,000)                            (150,000)                            (150,000) Marketing                              (150,000)                              (150,000)                              (150,000) Depreciation                                (3,000)                                (3,000)                                (3,000) Income before interest & taxes                             247,000 237000 291000 Percentage change in income before interest and taxes (i.e. Operating income) (237000-247000)/247000 * 100 (291000 ? 247000)/247000 * 100 -0.0405 0.1781

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