Imagine that you were a new CFO of Beily Inc., a children’s bicycle manufacturer. The president, Mr. Zhao, started the business 2 years ago. The firm manufactures two types of products, bicycles for girls and bicycles for boys. However, the two products have the same prices and costs structures, the only differences are the colors and designs. Recently, the president has started to focus more on the financial aspects of managing the business. Mr. Zhao has set up a meeting for next week with you, to discuss matters such as the business and financial risks faced by the company.

Accordingly, you are asked to prepare an analysis to assist his future management decisions. As a first step in the work, you are provided the following information regarding the company according to the past financial data:

As the next step, you are required to determine the break-even point in units of output for the company and report the result to Mr. Zhao. You are going to prepare an analytical income statement for the company. This statement will also be useful to Mr. Zhao in his work. In addition, you are planning to prepare and present in a format which is useful to answer the following questions to serve as a basis for Mr.
Zhao’s decisions for the company:

a. What is the firm’s break-even point in sales Renminbi (RMB)?

b. If sales should increase by 20 percent (as you estimate), by what percentage would EBT (earnings before taxes) and net income increase?

c. Prepare another income statement, this time to verify the calculations from part (b).

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Output level Operating assets Operating asset turnover Return on operating assets Degree of operating leverage Interest expense Tax rate 25,000 units RMB 2,000,000 5 times 45% 5 times RMB 300,000 25%