
1.
To compute: Times interest earned of M Company.
1.

Explanation of Solution
Given,
For M company
Income before interest is $200,000.
Interest expense is $60,000.
Times interest earned
Formula to calculate times interest earned,
Substitute $200,000 for income before interest and tax and $60,000 for interest expense.
Thus, times interest earned of M Company is 3.33 times.
2.
To compute: Times interest earned of W Company.
2.

Explanation of Solution
Given,
For W company
Income before interest is $400,000.
Interest expense is $260,000.
Times interest earned
Formula to calculate times interest earned,
Substitute $400,000 for income before interest and tax and $260,000 for interest expense.
Thus, times interest earned of W company is 1.54 times.
3.
To compute: Net income if sales increase by 30%.
3.

Explanation of Solution
Net income if sales increase by 30%.
Particulars | M Company ($) (given) | M Company ($) (30% increased sales) | W Company ($) (given) | W Company ($) (30% increased sales) |
Sales | 1000,000 | 1,300,000 | 1,000,000 | 1,300,000 |
Variable expenses | 800,000 | 1,040,000 | 600,000 | 780,000 |
Income before interest | 200,000 | 260,000 | 400,000 | 520,000 |
Interest expense | 60,000 | 60,000 | 260,000 | 260,000 |
Net income | 140,000 | 200,000 | 140,000 | 260,000 |
Increase in net income | 43% | 86% | ||
Table (1) |
Working note:
Formula to calculate percentage increase in net income,
For Company M
For Company W
Thus, net income of Company M gets increased by 43% and Company W by 86%.
4.
To compute: Net income if sales increase by 50%.
4.

Explanation of Solution
Net income if sales increase by 50%.
Particulars | M Company ($) (given) | M Company ($) (50% increased sales) | W Company ($) (given) | W Company ($) (50% increased sales) |
Sales | 1000,000 | 1,500,000 | 1,000,000 | 1,500,000 |
Variable expenses | 800,000 | 1,200,000 | 600,000 | 900,000 |
Income before interest | 200,000 | 300,000 | 400,000 | 600,000 |
Interest expense | 60,000 | 60,000 | 260,000 | 260,000 |
Net Income | 140,000 | 240,000 | 140,000 | 340,000 |
Increase in net income | 71% | 143% | ||
Table (1) |
Working Note:
Formula to calculate percentage increase in net income,
For Company M
For Company W
Thus, net income of Company M gets increased by 71% and Company W by 143%.
5.
To compute: Net income if sales increase by 80%.
5.

Explanation of Solution
Net income if sales increase by 80%.
Particulars | M Company ($) (given) | M Company ($) (80% increased sales) | W Company ($) (given) | W Company ($) (80% increased sales) |
Sales | 1000,000 | 1,800,000 | 1,000,000 | 1,800,000 |
Variable expenses | 800,000 | 1,440,000 | 600,000 | 1,080,000 |
Income before interest | 200,000 | 360,000 | 400,000 | 720,000 |
Interest expense | 60,000 | 60,000 | 260,000 | 260,000 |
Net Income | 140,000 | 300,000 | 140,000 | 460,000 |
Increase in net income | 114% | 229% | ||
Table (1) |
Working Note:
Formula to calculate percentage increase in net income,
For Company M
For Company W
Thus, net income of Company M gets increased by 114% and Company W by 229%.
6.
To compute: Net income if sales decrease by 10%.
6.

Explanation of Solution
Net income if sales decrease by 10%.
Particulars | M Company ($) (given) | M Company ($) (10% decreased sales) | W Company ($) (given) | W Company ($) (10% decreased sales) |
Sales | 1000,000 | 900,000 | 1,000,000 | 900,000 |
Variable expenses | 800,000 | 720,000 | 600,000 | 540,000 |
Income before interest | 200,000 | 180,000 | 400,000 | 360,000 |
Interest expense | 60,000 | 60,000 | 260,000 | 260,000 |
Net Income | 140,000 | 120,000 | 140,000 | 100,000 |
Increase in net income | -14% | -29% | ||
Table (1) |
Working note:
Formula to calculate percentage increase in net income,
For Company M
For Company W
Thus, net income of Company M gets decreased 14% and Company W by 29%.
7.
To compute: Net income if sales decrease by 20%.
7.

Explanation of Solution
Net income if sales decrease by 20%.
Particulars | M Company ($) (given) | M Company ($) (20% decreased sales) | W Company ($) (given) | W Company ($) (20% decreased sales) |
Sales | 1000,000 | 800,000 | 1,000,000 | 800,000 |
Variable expenses | 800,000 | 640,000 | 600,000 | 480,000 |
Income before interest | 200,000 | 160,000 | 400,000 | 320,000 |
Interest expense | 60,000 | 60,000 | 260,000 | 260,000 |
Net Income | 140,000 | 100,000 | 140,000 | 60,000 |
Increase in net income | -29% | -57% | ||
Table (1) |
Working Note:
Formula to calculate percentage increase in net income,
For Company M
For Company W
Thus, net income of Company M gets decreased 29% and Company W by 57%.
8.
To compute: Net income if sales decrease by 40%.
8.

Explanation of Solution
Net income if sales decrease by 40%.
Particulars | M Company ($) (given) | M Company ($) (40% decreased sales) | W Company ($) (given) | W Company ($) (40% decreased sales) |
Sales | 1000,000 | 600,000 | 1,000,000 | 600,000 |
Variable expenses | 800,000 | 480,000 | 600,000 | 360,000 |
Income before interest | 200,000 | 120,000 | 400,000 | 240,000 |
Interest expense | 60,000 | 60,000 | 260,000 | 260,000 |
Net Income | 140,000 | 60,000 | 140,000 | (20,000) |
Increase in net income | -57% | -114% | ||
Table (1) |
Working note:
Formula to calculate percentage increase in net income,
For Company M
For Company W
Thus, net income of Company M gets decreased 57% and Company W by 114%.
9.
Relation to fixed cost strategies of the two companies.
9.

Explanation of Solution
Relation to fixed cost strategies of the two companies,
- Here in this case fixed cost refers to interest expenses.
- Interest expenses in Company M are $ 60,000 and in Company W are $260,000. Interest expenses are higher in company W than in Company M.
- Due to higher interest expenses, change in net income gets more effected due to change in sales.
- Higher fixed cost is inversely related to times interest earned method.
- So if sales get increased, W Company enjoys higher percent increase in income in comparison to Company M.
- If sales get decreased, M Company experiences smaller percent change in net income in comparison to Company W.
Want to see more full solutions like this?
Chapter 9 Solutions
Financial and Managerial Accounting
- What would be the amount of depreciation expense for year 1 using the double declining balance method on these financial accounting question?arrow_forwardThe amount of the direct materials quantity variance?arrow_forwardStar Sports sells baseball equipment. On October 10, they shipped $5,600 worth of baseball gloves to Granite High School, terms 4/10, n/30. On October 18, they received an order from Eastwood Academy for $2,500 worth of custom-engraved bats to be produced in November. On October 28, Granite High School returned $520 of defective merchandise. Star Sports has received no payments from either school as of the month's end. What amount will be recognized as accounts receivable, net on the balance sheet as of October 31? I want answerarrow_forward
- What was the cash flow to stockholders of the financial accounting?arrow_forwardStar Sports sells baseball equipment. On October 10, they shipped $5,600 worth of baseball gloves to Granite High School, terms 4/10, n/30. On October 18, they received an order from Eastwood Academy for $2,500 worth of custom-engraved bats to be produced in November. On October 28, Granite High School returned $520 of defective merchandise. Star Sports has received no payments from either school as of the month's end. What amount will be recognized as accounts receivable, net on the balance sheet as of October 31?arrow_forwardHelparrow_forward
- AccountingAccountingISBN:9781337272094Author:WARREN, Carl S., Reeve, James M., Duchac, Jonathan E.Publisher:Cengage Learning,Accounting Information SystemsAccountingISBN:9781337619202Author:Hall, James A.Publisher:Cengage Learning,
- Horngren's Cost Accounting: A Managerial Emphasis...AccountingISBN:9780134475585Author:Srikant M. Datar, Madhav V. RajanPublisher:PEARSONIntermediate AccountingAccountingISBN:9781259722660Author:J. David Spiceland, Mark W. Nelson, Wayne M ThomasPublisher:McGraw-Hill EducationFinancial and Managerial AccountingAccountingISBN:9781259726705Author:John J Wild, Ken W. Shaw, Barbara Chiappetta Fundamental Accounting PrinciplesPublisher:McGraw-Hill Education





