Question: Review the chapter's opening feature about Matt and Bryan Walls, and their start-up company, SnorgTees. Assume that these young entrepreneurs are considering expanding their business to open an outlet in Europe. Assume their current income statement is as follows.
SNORGTEES
Income Statement
For Year Ended December 31, 2011
Sales . . . . . . . . . . . . . . . . . . . . . . . . . . $1,000,000
Cost of goods sold (30%) . . . . . . . . . . 300,000
Gross profit . . . . . . . . . . . . . . . . . . . . 700,000
Operating expenses (25%) . . . . . . . . 250,000
Net income . . . . . . . . . . . . . . . . . . . . $ 450,000
SnorgTees currently has no interest-bearing debt. If it expands to open a European location, it will require a $300,000 loan. SnorgTees has found a bank that will loan it the money on a 7% note payable. The company believes that, at least for the first few years, sales at its European location will be $250,000, and that all expenses (including cost of goods sold) will follow the same patterns as its current locations.
Required: 1. Prepare an income statement (showing three separate columns for current operations, European, and total) for SnorgTees assuming that it borrows the funds and expands to Europe. Annual revenues for current operations are expected to remain at $1,000,000.
2. Compute SnorgTees' times interest earned under the expansion assumptions in part 1.
3. Assume sales at its European location are $400,000. Prepare an income statement (with columns for current operations, European, and total) for the company and compute times interest earned.
4. Assume sales at its European location are $100,000. Prepare an income statement (with columns for current operations, European, and total) for the company and compute times interest earned.
5. Comment on your results from parts 1 through 4.