Shown here are condensed income statements for two different companies (both are organized as LLCs and pay no income taxes).
|
Ace Company |
Deuce Company |
||
|
Sales |
$500,000 |
Sales |
$500,000 |
|
Variable expenses (80%) |
400,000 |
Variable expenses (60%) |
300,000 |
|
Income before interest |
100,000 |
Income before interest |
200,000 |
|
Interest expense (fixed) |
30,000 |
Interest expense (fixed) |
130,000 |
|
Net income |
$70,000 |
Net income |
$70,000 |
Required
1. Compute times interest earned for Ace Company.
2. Compute times interest earned for Deuce Company.
3. What happens to each company’s net income if sales increase by 30%?
4. What happens to each company’s net income if sales increase by 50%?
5. What happens to each company’s net income if sales increase by 80%?
6. What happens to each company’s net income if sales decrease by 10%?
7. What happens to each company’s net income if sales decrease by 20%?
8. What happens to each company’s net income if sales decrease by 40%?
9. Comment on the results from parts 3 through 8 in relation to the fixed cost strategies of the two companies and the ratio values you computed in parts 1 and 2.