The accountant of Weatherspoon Shoe Co. has compiled the following information from the company’s records as a basis for an income statement for the year ended December 31, 2012.
|
Rental revenue |
$30,370 |
|
Interest expense |
$19,370 |
|
Market appreciation on land above cost |
$32,370 |
|
Wages and salaries-sales |
116,170 |
|
Materials and supplies-sales |
18,970 |
|
Income tax |
31,970 |
|
Wages and salaries-administrative |
137,270 |
|
Other administrative expenses |
53,070 |
|
Cost of goods sold |
517,370 |
|
Net sales |
981,370 |
|
Depreciation on plant assets (70% selling, 30% administrative) |
66,370 |
|
Dividends declared |
17,370 |
|
There were 19,500 shares of common stock outstanding during the year. |
|
Instructions:
1. Prepare a single-step income statement. (Round earnings per share to 2 decimal places, e.g. 5.25. For multiple entries list from largest to smallest amounts, e.g. 10, 5, 1. Enter all amounts as positive amounts and subtract where necessary.) estimates that it can change its production process, adding $4 million to investment and $500,000 to fixed operating costs. This change will (1) reduce variable costs per unit by $10,000 and (2) increase output by 20 units, but (3) the sales price on all units will have to be lowered to $95,000 to permit sales of the additional output. The firm has tax loss carryforwards that cause its tax rate to be zero, its cost of equity is 16%, and it uses no debt.
a. What is the incremental profit? To get a rough idea of the project’s profitability, what is the project’s expected rate of return for the next year (defined as the incremental profit divided by the investment)? Should the firm make the investment?
b. Would the firm’s break-even point increase or decrease if it made the change?
c. Would the new situation expose the firm to more or less business risk than the old one?