Shown here are condensed income statements for two different companies (assume no income taxes).

Required
1. Compute times interest earned for Ellis Company and for Seidel Company.
2. What happens to each company’s net income if sales increase by 10%?
3. What happens to each company’s net income if sales increase by 40%?
4. What happens to each company’s net income if sales decrease by 20%?
5. What happens to each company’s net income if sales decrease by 50%?

6. Which company would have a greater ability to pay interest expense if sales were to decrease?

Transcribed Image Text:

Ellis Company Sales .... Variable expenses (50%). Income before interest.. Interest expense (fixed) Net income... $240,000 120,000 120,000 90,000 $ 30,000 Seldel Company Sales .... Variable expenses (75%). Income before interest.. Interest expense (fixed) Net income... $240,000 180,000 60,000 30,000 $ 30,000