Question

Given the following information: sales = $450, costs = $350, tax rate = 34%, retention ratio = 30%, production = 95% of capacity,sales increase = 10%. What is the expected addition to retained earnings? (Assume costs change directly with sales.) 1.98 11.22 19.8 21.78 50.82

Answer 1

The correct option is (c) 21.78

Step-by-step explanation:

Given:

Sales = $450

Costs = $350

Increased sales = 450×1.1 = $495

Increased cost (in the same proportion) = 350×1.1 = $385

EBIT = Sales - cost

= 495 - 385

= $110

EAT = 110×(1-0.34)

= $72.60

Retention Ratio = 30%

Addition to retained earnings = EAT × retention ratio

= 72.6 ×0.3

= $21.78

Therefore, addition to retained earnings is $21.78.