Question

You have developed the following income statement for the Hugo Boss Corporation. It represents the most recent year’s operations, which ended yesterday.

Sales $ 50,439,375
Variable costs (25,137,000)
Revenue before fixed costs $ 25,302,375
Fixed costs (10,143,000)
EBIT $ 15,159,375
Interest expense (1,488,375)
Earnings before taxes $ 13,671,000
Taxes at 21% (2,870,910)
Net income $ 10,800,090
If sales should increase by 30 percent, by what percent would earnings before taxes (and net income) increase?

Answer 1

If sales increase by 30%, the earnings before taxes (and net income) would increase by approximately 8.1%.

Step-by-step explanation:

To calculate the increase in earnings before taxes (and net income) resulting from a 30% increase in sales, we need to apply the profit margin to the increase in sales.

The profit margin is calculated by dividing the earnings before taxes by the sales. In this case, the profit margin is

$13,671,000 / $50,439,375 = 0.27, or 27%.

So, if sales increase by 30%, the earnings before taxes (and net income) would increase by 30% multiplied by the profit margin of 27%, which equals an increase of 8.1%.

Therefore, the earnings before taxes (and net income) would increase by approximately 8.1%.