PROBLEM
1.Selected information for two companies is presented below:
Pure Cane SugarOrtho-Dental Co.
Sales$6,000,000$6,000,000
Total Expenses3,500,0003,500,000
Fixed costs1,550,0002,700,000
Variable costs1,950,000800,000
Required:
a.Calculate net income for each company.
b.Which company has higher operating leverage?
c.Suppose sales decreased by 15%. Which company will report the highest net income? Why?
d.Suppose sales increased by 15%. Which company will report the highest net income? Why?
2.Financial statement information for Heller Company is presented below:
(in millions)2007
Sales$2,000
Cost of goods sold400
Operating expense800
Interest expense200
Income tax expense180
Net income$ 420
The company expects sales to increase 30% in 2008. Also, 65% of cost of goods sold and operating expenses are variable costs. Income tax expense is 30% of pretax income. Other expenses are fixed.
Required:
a.Calculate expected net income for 2008.
b.Calculate the percent change in net income. Comment on the company's use of operating leverage.