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 |
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%?
Analysis Component
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.
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