Question

Shown here are condensed income statements for two different companies (both are organized as LLCs and pay no income taxes).

Ace Company
Sales $500,000
Variable expenses (80%) 400,000
Income before interest 100,000
Interest expense (fixed) 30,000
Net income $70,000


Deuce Company
Sales $500,000
Variable expenses (60%) 300,000
Income before interest 200,000
Interest expense (fixed) 130,000
Net income $ 70,000

(state whether it increases or decreases and by what % for each company)

What happens to each company's net income if sales increase by 50%? (Round your answers to the nearest percentage. Omit the "%" sign in your response.)


Ace Co.- ?
Deuce Co.- ?

Answer 1

Codensed income statement:Effect of increase in sales on net income;A 50% increase in sales leads to an increase in net income by 50,000 for Ace Company, and 100,000 for Deuce Company.

Answer 2

An increase in Sales is also going to increase Variable Expenses. Fixed Costs will not be affected by an increase in Sales.

I'll do the first one for you, then you can do the other one.

Ace:
Sales: $500,000 x 150% = $750,000
Variable Expenses: $750,000 x 80% = $600,000

Sales $750,000
Var. Exp. (600,000)
Interest Exp. (30,000)
Net Income $120,000

Net Income increases by $50,000 or approximately 71% ([($120,000-$70,000)/$70,000]).

Hope that helps. Please rate.