The Alexander Company reported the following income statement for 2013: Assume that all depreciation and 75 percent
Question:
Assume that all depreciation and 75 percent of the firm's selling, general, and administrative expenses are fixed costs and that the remainder of the firm's operating expenses are variable costs.
a. Determine Alexander's fixed costs, variable costs, and variable cost ratio.
b. Based on its 2013 sales, calculate the following for the firm: ¢i. DOL ¢ii. DFL ¢iii. DCL
c. Assume that next year's sales increase by 15 percent, that fixed operating and financial costs remain constant, and that the variable cost ratio and tax rate also remain constant. Use the leverage figures just calculated to forecast next year's EPS.
d. Show the validity of this forecast by constructing Alexander's income statement for next year according to the revised format.
e. Construct an EPS-EBIT graph based on Alexander's 2013 income statement.
Step by Step Answer:
Contemporary Financial Management
ISBN: 978-1285198842
13th edition
Authors: R. Charles Moyer, James R. McGuigan, Ramesh P. Rao