Page 412- Break-even Analysis Complete Mini Case #2 on page 412 and submit to in

Question

Page 412- Break-even Analysis
Complete Mini Case #2 on page 412 and submit to instructor. In parts "a" to "c," clearly label the calculation of the required ratios and solve using Excel. Use formulas to calculate the ratios and format the cells to insert a comma if there is more than three numbers. Round to the nearest whole number. In each part, summarize your analysis in a concise management statement not to exceed 100 words each.
2. Camping USA Inc. has only been operating for 2 years in the outskirts of Albuquerque, New Mexico, and is a new manufacturer of a top-of-the-line camping tent. You are starting an internship as assistant to the chief financial officer of the company, and the owner and CEO, Tom Charles, has decided that this is the right time to know more about the business and financial risks his company must deal with. For this, the CFO has asked you to prepare an analysis to support him in his next meeting with Tom Charles a week from today. To make the required calculations, you have put together the following data regarding the cost structure of the company:
MINI CASE

DATA
Output level 120,000
Operating assets 6,000,000
Operating asset turnover 12
Return on operating assets 48%
Degree of operating leverage 10
Interest expense 720,000
Tax rate 42%

The CFO has instructed you to first determine the break-even point in units of output for the company. He requires that you prepare supporting documents, which demonstrate how you arrived at your conclusion and can facilitate his review of your work. Accordingly, you are required to have the information needed to prepare an analytical income statement for the company to be presented to the CFO. In a format that is acceptable for a meeting discussion with the CEO, you also need to prepare answers to the following questions:
a.) what is the firm’s break-even point in sales dollars?
b.) If sales should increase by 40%, by what % would EBT (earnings before taxes) and net income increase?
c.) Prepare another income statement, this time to verify the calculations from part d.

Explanation / Answer

a. Sales 100% $72,000,000 Variable cost 21.034% $15,144,830 Contribution $56,855,170 Fixed cost(Operating expenses) $51,169,653 Operating income $5,685,517 Interest expenses $720,000 Income before tax $4,965,517 Tax 42% $2,085,517 Net income $2,880,000 Break Even Point = Fixed cost / Contribution margin Contribution margin = Contribution / Sales *100 = 56855170 / 72000000*100 = 78.97% BEP = 51169653 / 78.97% = $64,796,319 Working: Tax = 42% Net income = 58% Tax + Net income = Income before tax Income before tax = 58%+ 42% Net income 58% = $2,880,000 42% = 2880000*42/58 Tax = $2,085,517 Income before tax = 2880000 + 2085517 Income before tax = $4,965,517 Operating income = Income before tax + Interest = 4965517 + 720000 Operating income = $5,685,517 Degree of operating leverage = 10 Degree of operating leverage = Contribution margin / Net operating income Contribution margin / 5685517 = 10 Contribution margin = 10 * 5685517 Contribution margin = $56,855,170 Sales - Variable cost = Contribution margin 72000000 - Variable cost = $56,855,170 Variable cost = 72000000 - 56855170 Variable cost = $15,144,830 Operating expenses = Contribution - Operating income = 56855170 - 5685517 Operating expenses = $51,169,653 b. Sales Increased to 40% Present sales $72,000,000 40% sales 28800000 Total sales $100,800,000 Sales $100,800,000 Variable cost 21.03% 21202272 Contribution margin $78.97 $79,597,728 Fixed cost $51,169,653 Operating income $28,428,075 BEP Fixed cost / Contribution margin = 51169653 / 78.98% = $64,796,319 c. Sales 100% $64,796,319 Variable cost 21.03% 13626665.89 Contribution $51,169,653 Fixed cost $51,169,653 $0 Sales 100% $72,000,000 Variable cost 21.034% $15,144,830 Contribution $56,855,170 Fixed cost(Operating expenses) $51,169,653 Operating income $5,685,517 Interest expenses $720,000 Income before tax $4,965,517 Tax 42% $2,085,517 Net income $2,880,000

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