Shown here are condensed income statements for two different companies (both are organized as LLCs and pay no income taxes).
|
Virgo Company |
Zodiac Company |
||
|
Sales |
$120,000 |
Sales |
$120,000 |
|
Variable expenses (50%) |
60,000 |
Variable expenses (75%) |
90,000 |
|
Income before interest |
60,000 |
Income before interest |
30,000 |
|
Interest expense (fixed) |
45,000 |
Interest expense (fixed) |
15,000 |
|
Net income |
$15,000 |
Net income |
$15,000 |
Required
1. Compute times interest earned for Virgo Company.
2. Compute times interest earned for Zodiac Company.
3. What happens to each company’s net income if sales increase by 10%?
4. What happens to each company’s net income if sales increase by 40%?
5. What happens to each company’s net income if sales increase by 90%?
6. What happens to each company’s net income if sales decrease by 20%?
7. What happens to each company’s net income if sales decrease by 50%?
8. What happens to each company’s net income if sales decrease by 80%?
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.