Problem 115A Computing and analyzing times interest earned L

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

Solution

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
Sales	1440000 (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 increase	29 % {(214000-166000)/166000*100}	58% {(262000-166000)/166000*100}