Shown here are condensed income statements for two different companies (assume no income taxes). Ellis CompanySales . . . . . . . . . . . . . . . . . . . . . . . . . . . . $240,000Variable expenses (50%) . . . . . . . . . . . . 120,000Income before interest . . . . . . . . . . . . . 120,000Interest expense (fixed) . . . . . . . . . . . . . 90,000Net income . . . . . . . . . . . . . . . . . . . . . . . $ 30,000 Seidel CompanySales . . . . . . . . . . . . . . . . . . . . . . . . . . . . $240,000Variable expenses (75%) . . . . . . . . . . . . 180,000Income before interest . . . . . . . . . . . . . 60,000Interest expense (fixed) . . . . . . . . . . . . . 30,000Net income . . . . . . . . . . . . . . . . . . . . . . . $ 30,000 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%? Analysis Component 6. Which company would have a greater ability to pay interest expense if sales were to decrease?
Shown here are condensed income statements for two different companies (assume no income taxes). Ellis Company
Sales . . . . . . . . . . . . . . . . . . . . . . . . . . . . $240,000
Variable expenses (50%) . . . . . . . . . . . . 120,000
Income before interest . . . . . . . . . . . . . 120,000
Interest expense (fixed) . . . . . . . . . . . . . 90,000
Net income . . . . . . . . . . . . . . . . . . . . . . . $ 30,000 Seidel Company
Sales . . . . . . . . . . . . . . . . . . . . . . . . . . . . $240,000
Variable expenses (75%) . . . . . . . . . . . . 180,000
Income before interest . . . . . . . . . . . . . 60,000
Interest expense (fixed) . . . . . . . . . . . . . 30,000
Net income . . . . . . . . . . . . . . . . . . . . . . . $ 30,000 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%?
Analysis Component
6. Which company would have a greater ability to pay interest expense if sales were to decrease?
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