To make the required calculations, you have put together the following date regarding the cost structure of the company: Output level 120,000 units, Operating assets $6,000,000, Operating asset turnover 12 times, Return on operating assets 48%, Degree of operating leverage 10 times, Interest expense $720,000, tax rate 42%. The CFO has instructed you to first determine the break even point in units of output for the company. He requires that you prepare supporting documents which demonstrate how you arrived at your conclusion and can facilitate his review of your work. Accordingly, you are required to have the information needed to prepare an analysis income statement for the company to be presented to the CFO. In a format that is acceptable for a meeting discussion with the CFO, you also need to prepare answers to the following questions.
a. What is the firm’s break even point in sales dollars?
b. If sales should increase by 40 percent, by what percentage would EBT (earnings before taxes) and net income increase?
c. Prepare another income statement, this time to verify the calculations from part b.
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This question was asked on Mar 17, 2010 and answered on Mar 17, 2010.
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