The Alexander Company reported the following income statement for 2004:
Assume that all depreciation and 75 percent 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, calculate the following:
i. The firm's DOL
ii. The firm's DFL
iii. The firm's DCL
c. Assuming that next year's sales increase by 15 percent, 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 year's EPS.
d. Show the validity of this forecast by constructing Alexander's income statement for next year according to the revised format.
e. Construct an EPS-EBIT graph based on Alexander's 2004 income statement.