Genatron wants to estimate what will happen to its income before interest and taxes if its net sales change from the 2020 level of $1,500,000. Refer to Genatron’s 2020 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.

Data from problem 6

Financial statements for the Genatron Manufacturing Corporation for 2020 and 2019 are shown in the text.

Balance sheet ASSETS	2020	2019
Cash	$40,000	$50,000
Accts. receivable	260,000	200,000
Inventory	500,000	450,000
Total current assets	800,000	700,000
Fixed assets, net	400,000	300,000
Total assets LIABILITIES AND EQUITY	$1,200,000	$1,000,000
Accts. payable	$170,000	$130,000
Bank loan	90,000	90,000
Accruals	70,000	50,000
Total current liabilities	330,000	270,000
Long-term debt, 12%	400,000	300,000
Common stock, $10 par	300,000	300,000
Capital surplus	50,000	50,000
Retained Earnings	120,000	80,000
Income statement	2020	2019
Net sales	$1,500,000	$1,300,000
Cost of goods sold	900,000	780,000
Gross profit	600,000	520,000
Expenses: general and administrative	150,000	150,000
Marketing	150,000	130,000
Depreciation	53,000	40,000
Interest	57,000	45,000
Earnings before taxes	190,000	155,000
Income taxes	76,000	62,000
Net income	$114,000	$93,000