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Chapter 2: 5BP_a (page 146)
Eaton Tool Company has fixed costs of \(255,000, sells its units for \)66, and has variable costs of $36 per unit.
a. Compute the break-even point.
The break-even point of the company is 8,500 units.
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Inflation can have significant effects on income statements and balance sheets, and therefore on the calculation of ratios. Discuss the possible impact of inflation on the following ratios, and explain the direction of the impact based on your assumptions. (LO3-5)
d. Debt-to-assets ratio
Lemon Auto Wholesalers had sales of \(1,000,000 last year, and cost of goods sold represented 78 percent of sales. Selling and administrative expenses were 12 percent of sales. Depreciation expense was \)11,000 and interest expense for the year was \(8,000. The firm鈥檚 tax rate is 30 percent.
a. Compute earnings after taxes.
b. Assume the firm hires Ms. Carr, an efficiency expert, as a consultant. She suggests that by increasing selling and administrative expenses to 14 percent of sales, sales can be increased to \)1,050,900. The extra sales effort will also reduce cost of goods sold to 74 percent of sales. (There will be a larger markup in prices as a result of more aggressive selling.) Depreciation expense will remain at \(11,000. However, more automobiles will have to be carried in inventory to satisfy customers, and interest expense will go up to \)15,800. The firm鈥檚 tax rate will remain at 30 percent. Compute revised earnings after taxes based on Ms. Carr鈥檚 suggestions for Lemon Auto Wholesalers. Will her ideas increase or decrease profitability?
Elizabeth Tailors Inc. has assets of $8,940,000 and turns over its assets 1.9 times per year. Return on assets is 13.5 percent. What is the firm鈥檚 profit margin (returns on sales)?
Discuss some financial variables that affect the price-earnings ratio
A firm has net income before interest and taxes of \(193,000 and interest expense of \)28,100.
b. If the firm鈥檚 lease payments are $48,500, what is the fixed charge coverage?
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