Problem 11-5A Computing and analyzing times interest earned LO A1 [The following
ID: 2610052 • Letter: P
Question
Problem 11-5A Computing and analyzing times interest earned LO A1
[The following information applies to the questions displayed below.]
Shown here are condensed income statements for two different companies (both are organized as LLCs and pay no income taxes).
960,000
166,000
720,000
166,000
1. Compute times interest earned for Miller Company.
2. Compute times interest earned for Weaver Company.
3. What happens to each company's net income if sales increase by 20%. (Round your answers to nearest whole percent.)
4. What happens to each company's net income if sales increase by 30%? (Round your answers to nearest whole percent.)
5. What happens to each company's net income if sales increase by 60%? (Round your answers to nearest whole percent.)
6. What happens to each company's net income if sales decrease by 20%? (Round your answers to nearest whole percent.)
7. What happens to each company's net income if sales decrease by 30%? (Round your answers to nearest whole percent.)
8. What happens to each company's net income if sales decrease by 40%? (Round your answers to nearest whole percent.)
Miller Company Sales $ 1,200,000 Variable expenses (80%)960,000
Income before interest 240,000 Interest expense (fixed) 74,000 Net income $166,000
Explanation / Answer
1. Times interest earned= Eaning before interest and Tax expense/Interest expense
Miller Co. = 240000/74000 = 3.24
2. Weaver Co. = 480000/314000 = 1.53
3. Company's net income if sales increase by 20%
1440000
(1200000*120%)
1440000
(1200000*120%)
-1152000
(80% of sales)
-864000
(60% of sales)
29 %
{(214000-166000)/166000*100}
58%
{(262000-166000)/166000*100}
4. Company's net income if sales increase by 30%
1560000
(1200000*130%)
1560000
(1200000*130%)
-1248000
(80% of sales)
-936000
(60% of sales)
43 %
{(238000-166000)/166000*100}
87%
{(310000-166000)/166000*100}
5. Company's net income if sales increase by 60%
1920000
(1200000*160%)
1920000
(1200000*160%)
-1536000
(80% of sales)
-1152000
(60% of sales)
87 %
{(310000-166000)/166000*100}
173%
{(454000-166000)/166000*100}
6. company's net income if sales decrease by 20%
960000
(1200000*80%)
960000
(1200000*80%)
-768000
(80% of sales)
-576000
(60% of sales)
29 %
{(118000-166000)/166000*100}
58%
{(70000-166000)/166000*100}
7. company's net income if sales decrease by 30%
840000
(1200000*70%)
840000
(1200000*70%)
-672000
(80% of sales)
-504000
(60% of sales)
-43%
{(94000-166000)/166000*100}
87%
{(22000-166000)/166000*100}
8. company's net income if sales decrease by 40%
720000
(1200000*60%)
720000
(1200000*60%)
-576000
(80% of sales)
-432000
(60% of sales)
-58%
{(70000-166000)/166000*100}
-116%
{(-26000-166000)/166000*100}
Miller Weaver Sales1440000
(1200000*120%)
1440000
(1200000*120%)
Less : Variable expenses-1152000
(80% of sales)
-864000
(60% of sales)
Income before interest 288000 576000 Less : Interest expense (fixed) -74000 -314000 Net Income 214000 262000 Net Income before sales increase 166000 166000 Percentage increase29 %
{(214000-166000)/166000*100}
58%
{(262000-166000)/166000*100}