You have developed the following pro forma income statement for your corporation:
Sales $45,729,000
Variable Costs (22,740,000)
Revenue before fixed costs 22,989,000
Fixed costs (9,129,000)
EBIT 13,860,000
Interest expense (1,353,000)
Earnings before taxes 12,507,000
Taxes (50%) (6,253,500)
Net Income 6,253,500
It represents the most recent year's operations, which ended yesterday. Your Supervisor in the controller's office has just handed you a memorandum asking for written responses to the following questions:
A) If sales should increase by 30%, by what percent would earnings before interest and taxes increase? What percent would net income increase? (Round to two decimal points)
B) If sales should decrease by 30%, by what percent would earnings before interest and taxes decrease? What percent would net income decrease? (Round to two decimal points)
C) If the firm were to reduce its reliance on debt financing such that interest expense were cut in half, how would this affect your answers to parts a and b?