Problem: The Alexander Company reported the following income statement for 2004:
| Sales |
|
|
|
|
|
|
|
$15,000,000 |
| Less Operating expenses |
|
|
|
|
|
|
| Wages, slaries, benefits |
|
|
|
|
$6,000,000 |
|
| raw materials |
|
|
|
|
|
3,000,000 |
|
| depreciation |
|
|
|
|
|
1,500,000 |
|
| general, administrative, and selling expenses |
|
|
1,500,000 |
|
| Total operating expenses |
|
|
|
|
|
12,000,000 |
| Earnings before interest and taxes |
|
|
|
|
$3,000,000 |
| Less Interest expense |
|
|
|
|
|
750,000 |
| Earning before taxes |
|
|
|
|
|
|
$2,250,000 |
| Less income taxes |
|
|
|
|
|
|
1,000,000 |
| Earnings after taxes |
|
|
|
|
|
|
1,250,000 |
| Less Perferred dividends |
|
|
|
|
|
250,000 |
| Earnings availabe to common stockholders |
|
|
|
|
1,000,000 |
| Earnings per share -250,000 shares outstanding |
|
|
|
4 |
Assume that all depreciation and 75% of the firm's general, administrative and selling expenses are fixed costs and that the remainder of the firm's operating expenses are variable costs.
a) Determine Alexander's fixed costs, variable costs and variable cost ratio
b) Based on its 2004 sales, caculate the following:
DOL
DFL
DCL
c) Assuming that next year's sales incraese by 15% , fixed operating and financial costs remain constant, and the variable cost ratio and tax rate also remain constant, use the leverage figures just calculated to forecast next eyars EPS.
d) Show the validity of this forecast by constructing Alexanders' income statemetn for next year according to the revised format.