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Chapter 2: 23BP_b (page 82)

The Lancaster Corporation鈥檚 income statement is given below.

b. What would be the fixed-charge-coverage ratio?

Lancaster corporation

Sales

\(246,000

Cost of goods sold

122,000

Gross profit

\)124,000

Fixed charges (other than interest)

27,500

Income before interest and taxes

\(96,500

Interest

21,800

Income before taxes

\)74,700

Taxes (35%)

26,145

Income after taxes

$48,555

Short Answer

Expert verified

The fixed charge coverage of Lancaster Corporation is 2.52.

Step by step solution

01

Fixed charges coverage ratio 

Fixed charges coverage ratio is computed to know the company鈥檚 ability to cover its fixed expenses out of the profits.

02

Calculation of Fixed charges coverage ratio 

Fixedchargescoverageratio=Earningbeforeinterestandtaxes+FixedchargesbeforetaxInterestexpense+Fixedchargesbeforetax=$96,500+$27,500$21,800+$27,500=2.52

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