(Leverage Analysis) You have developed the following income statement for the Hu
ID: 2674561 • Letter: #
Question
(Leverage Analysis) You have developed the following income statement for the Hugo Boss Corporation. It represents the most recent year’s operations, which ended yesterday.Sales $50,439,375
Variable cost (25,137,000)
Revenue before fixed costs $25,302,375
Fixed costs (10,143,000)
EBIT $15,159,375
Interest expense (1,488,375)
Earnings before taxes $13,671,000
Taxes at 50% (6,835,500)
Net income $6,835,500
Your supervisor in the controller’s office has just handed you a memorandum asking for written responses to the following questions:
A) What is the firm’s break-even point in sales dollars?
B) If sales should increase by 30%, by what percent would earnings before taxes (and net income) increase?
Explanation / Answer
A)
Sales : Variable Cost= 50439375 : 25137000
= 2989 : 1489.6
Since the sales and variable cost are in the above ratio
For sales to be break even sales and cost ratio should be 1 : 1 i.e. sales should be equal to the total cost.
As the variable cost covers 1489.6 part in ratio rest i.e. ( 2989-1489.6) = 1499.4 should be covered by the fixed cost.
Break Even Sales = 10143000/(2989-1489.6)*2989
=20219726 (approximately)
B)
Sales $50,439,375 65571187.5
Variable cost (25,137,000) (32678100)
Revenue before fixed costs $25,302,375 32893087.5
Fixed costs (10,143,000) (10143000)
EBIT $15,159,375 22750087.5
Increase in the EBIT = 22750087.5-15159375
=7596112.5
% Increase in EBIT = 7596112.5/15159375*100
= 50.11
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