The condensed income statements for years 20x1 and 20x2 for the Ruhf Inn are shown below:...
The condensed income statements for years 20x1 and 20x2 for the Ruhf Inn are shown below:
20x1 20x2
Room revenue $ 2,500,000 $3,000,000
Room labor costs 400,000 500,000
Room other expenses 300,000 350,000
Room income 1,800,000 2,150,000
Undistributed operating expenses 500,000 600,000
Interest expense 200,000 250,000
Rent expense 100,000 120,000
Other fixed charges 400,000 400,000
Income before taxes 600,000 780,000
Income taxes 200,000 260,000
Net Income 400,000 520,000
Required:
1. Determine the following for each year:
a. Number of times interest earned ratio
b. Fixed charge coverage ratio
c. profit margin
d. Room labor cost percentage
e. Average tax rate
2. Prepare a common size income statement for 20x1 and 20x2 and comment on any significant differences in the percentages
Homework Answers
1.
| No of time interest earned ratio | EBIT/Interest | (600,000+200,000)/200,000 = 4 times | (780000+250000)/400000 = 4.12 times |
| Fixed charge coverage ratio | EBIT+fixed charge/Interest+fixed charge |
(800000+400000+100000)/(200,000+400,000+100,000) = 1.86 times |
(1030000+400000+120000)/(250000+400000+120000) = 2.01 times |
| Profit margin | (assuming net profit) Net Income/Room Revenue*100 | 400000/2500000*100 = 16% | 520000/3000000*100 =17.33% |
| Room Labor cost % | (assuming % of sales) Labor Cost/room revenue*100 | 400000/2500000*100 = 16% | 500000/3000000*100 = 16.67% |
2.
| 20x1 | 20x2 | |||
| Room revenue | 2,500,000.00 | 100.00% | 3,000,000.00 | 100.00% |
| Room labor cost | 400,000.00 | 16.00% | 500,000.00 | 16.67% |
| Room other expenses | 300,000.00 | 12.00% | 350,000.00 | 11.67% |
| Gross profit | 1,800,000.00 | 72.00% | 2,150,000.00 | 71.67% |
| Undistributed Operating expense | 500,000.00 | 20.00% | 600,000.00 | 20.00% |
| Rent expense | 100,000.00 | 4.00% | 120,000.00 | 4.00% |
| other fixed charges | 400,000.00 | 16.00% | 400,000.00 | 13.33% |
| Operating income (EBIT) | 800,000.00 | 32.00% | 1,030,000.00 | 34.33% |
| Interest | 200,000.00 | 8.00% | 250,000.00 | 8.33% |
| EBT | 600,000.00 | 24.00% | 780,000.00 | 26.00% |
| Taxes thereon | 200,000.00 | 8.00% | 260,000.00 | 8.67% |
| Net income | 400,000.00 | 16.00% | 520,000.00 | 17.33% |
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