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Chapter 2: 6DQ (page 75)
Why is trend analysis helpful in analyzing ratios?
Trend analysis represents the changes in the ratios over time. It allows one to see changes that occur in the profitability, capital employed, etc. of the company over time.
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We are given the following information for the Pettit Corporation.
Sales (credit) | $3,549,000 |
Cash | 179,000 |
Inventory | 911,000 |
Current liabilities | 788,000 |
Assets turnover | 1.40 times |
Current ratio | 2.95 times |
Debt-to-assets ratio | 40% |
Receivables turnover | 7 times |
Current assets are composed of cash, marketable securities, accounts receivable, and inventory. Calculate the following balance sheet items.
b. Marketable securities.
Why is interest expense said to cost the firm substantially less than the actual expense, while dividends cost it 100 percent of the outlay?
The Sterling Tire Company鈥檚 income statement for 20X1 is as follows:
STERLINE TIRE COMPANY Income Statement For the year ended December 31, 20X1 | |
Sales (20,000 tires at \(60 each) | \)1,200,000 |
Less: variable costs (20,000 tires at \(30) | 600,000 |
Less: fixed cost | 400,000 |
Earnings before interest and taxes (EBIT) | \)200,000 |
Interest expenses | 50,000 |
Earning before taxes (EBT) | \(150,000 |
Income tax expenses (30%) | 45,000 |
Earning after taxe (EAT) | \)105,000 |
Given this income statement, compute the following:
d. Break even point in units.
International Data Systems鈥� information on revenue and costs is relevant only up to a sales volume of 105,000 units. After 105,000 units, the market becomes saturated and the price per unit falls from \(14.00 to \)8.80. Also, there are cost overruns at a production volume of over 105,000 units, and variable cost per unit goes up from \(7.00 to \)8.00. Fixed costs remain the same at $55,000.
b. Compute operating income at 205,000 units.
Discuss the advantage and disadvantage of level production schedules in firms with cyclical sales.
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