BTN 97 Review the chapters opening feature about Marcela Sap

BTN 9-7 Review the chapter\'s opening feature about Marcela Sapone and Jessica Beck and the business they founded, Hello Alfred. Assume that they are considering expanding the business to Europe and that the current abbreviated income statement appears as follows. HELLO ALFRED Income Statement For Year Ended December 31, 2017 Sales Operating expenses (55%) Net income $1,000,000 550.000 $ 450,000 Assume also that Hello Alfred currently has no interest-bearing debt. If it expands to Europe, it will require a $300,000 loan. Hello Alfred has found a bank that will loan it the money on a 7% note payable. The company believes that, at least for the first few years, sales in Europe will equal $250,000 and that all expenses at both locations will continue to equal 55% of sales. Required 1. Prepare an income statement (showing three separate columns for current operations, European, and total) for the company assuming that it borrows the funds and expands to Europe. Annual revenues for current operations are expected to remain at $1,000,000. 2. Compute the company\'s times interest earned under the expansion assumptions in part1. 3. Assume sales in Europe are $400,000. Prepare an income statement (with columns for current operations, European, and total) for the company and compute times interest earned. 4. Assume sales in Europe are $100,000. Prepare an income statement (with columns for current operations, European, and total) for the company and compute times interest earned 5. Comment on your results from parts 1 through 4

Solution

1.Hello Alfred Income Statement For the Year Ended Decemeber 2017 Particulars Current Operations European Total Sales $100000 $250000 $350000 Less:Operating Expenses(55% of sales) ($55000) ($137500) ($192500) Less:Interest Expenses($3lakhs*7%) - ($21000) ($21000) Net Income $45000 $91500 $136500 2.Times Interest earned at company level Formula Earning Before interest and Taxes/ $157500/21000 Interest Expense 7.5 $157500=$350000-$192500 3.Assume Sales in Europe are $400000 Particulars Current Operations European Total Sales $100000 $400000 $500000 Less:Operating Expenses(55% of sales) ($55000) ($220000) ($275000) Less:Interest Expenses($3lakhs*7%) - ($21000) ($21000) Net Income $45000 $159000 $204000 4.Assume sales in Europe are $100000 Particulars Current Operations European Total Sales $100000 $100000 $200000 Less:Operating Expenses(55% of sales) ($55000) ($55000) ($110000) Less:Interest Expenses($3lakhs*7%) - ($21000) ($21000) Net Income $45000 $24000 $69000 5.comment Ans:Company Expansion always seems to be beneficial which always shows Positive Income even at the lower income level of $100000, It is a good time to expand with interest by borrowing loan at 7%. As We observe from step 1 to step 4 which results in , Profit is increasing by increasing in Revenues and profit is decreasing by decreasing in revenues i.e more the sales and More the profit and Interest Expenses are only an additional Expenses in case of expansion into europe