Genatron wants to estimate what will happen to its income before interest and taxes if its net sales change from the 2015 level of $1,500,000. Refer to Genatron’s 2015 income statement, shown in Problem 6, where the income before interest and taxes is $247,000 (EBT of $190,000 plus Interest of $57,000). Assume that the cost of goods sold are variable expenses and that the other operating expenses are fixed.
a. Calculate the expected amount of income before interest and taxes for both a 10 percent decrease and a 10 percent increase in net sales for next year.
b. Determine the percentage change in income before interest and taxes given your calculations in Part a, and determine the degree of operating leverage.