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

Part - A

Part -B

% change inby increasin and deceraing 10% is as follows

By decreasing 10% (-10%), % change in operating income = (187000-247000)/247000 =-24.29%

By increasing 10% (+10%), % change in oeprating income = (307000-247000)/247000 = 19.54%

Dregree of oeprating leverage is % Change in EBIT/% change in sales

So the degree of operating leverage for -10% = -24.29/-10 = 2.429

So the degree of operating leverage for +10% = 19.54/10 = 1.954

Current 2012 -10% 10% Net Sales 1500000 1350000 1650000 COGS -900000 -810000 -990000 Gross profit 600000 540000 660000 Genral & adminstrative -150000 -150000 -150000 Marketing -15000 -15000 -15000 Depriciation -3000 -3000 -3000 Misc. Expenses (not given - assumed) -185000 -185000 -185000 Earnings before interest and tax 247000 187000 307000

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