Concept Introduction:
Times Interest earned:
Times interest earned is used to assess the company's ability to meet its interest payment dues. The following formula is used to calculate the ratio.
Requirement 1:
To Compute:
The times interest earned for the given companies
Answer to Problem 5APSA
The times interest earned for Miller Company is 3.33 and the times interest earned for Weaver Company is 1.54
Explanation of Solution
| Miller Company | Weaver Company | |
| Income before Interest | 200,000 | 400,000 |
| Interest Expenses | 60,000 | 260,000 |
| Times Interest Earned |
|
|
Thus, the times interest earned have been calculated for two companies.
Concept Introduction:
Times Interest earned:
Times interest earned is used to assess the company's ability to meet its interest payment dues. The following formula is used to calculate the ratio.
Requirement 2:
The impact of sales increase by 30% on each company's net income
Answer to Problem 5APSA
When sales increase by 30%, the Net Income of Miller Company becomes $ 200,000 from $140,000 resulting in 43% increase over previous profits. For Weaver Company the profit increases from $ 140,000 to $260,000 resulting in 86% increase over last profits.
Explanation of Solution
| Miller Company | Weaver Company | |||||
| Present | Increased sales by 30% | Increase /(Decrease ) in %age | Present | Increased sales by 30% | Increase /(Decrease ) in %age | |
| Sales | 1,000,000 | 1,300,000 | 30% | 1,000,000 | 1,300,000 | 30% |
| Variable Expenses | 800,000 | 1,040,000 | 30% | 600,000 | 780,000 | 30% |
| Income before Interest | 200,000 | 2,60,000 | 30% | 400,000 | 5,20,000 | 30% |
| Interest Expense (fixed) | 60,000 | 60,000 | 0% | 260,000 | 260,000 | 0% |
| Net Income | 140,000 | 200,000 | 42.86% | 140,000 | 260,000 | 85.71% |
Thus, the impact of sales increase have been calculated.
Concept Introduction:
Times Interest earned:
Times interest earned is used to assess the company's ability to meet its interest payment dues. The following formula is used to calculate the ratio.
Requirement 3:
The impact of sales increase by 50% on each company's net income
Answer to Problem 5APSA
When sales increase by 50%, the Net Income of Miller Company becomes $ 240,000 from $140,000 resulting in 71% increase over previous profits. For Weaver Company the profit increases from $ 140,000 to $340,000 resulting in 143% increase over last profits.
Explanation of Solution
| Miller Company | Weaver Company | |||||
| Present | Increased sales by 50% | Increase /(Decrease ) in %age | Present | Increased sales by 50% | Increase /(Decrease ) in %age | |
| Sales | 1,000,000 | 1,500,000 | 50% | 1,000,000 | 1,500,000 | 50% |
| Variable Expenses | 800,000 | 1,200,000 | 50% | 600,000 | 900,000 | 50% |
| Income before Interest | 200,000 | 3,00,000 | 50% | 400,000 | 6,00,000 | 50% |
| Interest Expense (fixed) | 60,000 | 60,000 | 0% | 260,000 | 260,000 | 0% |
| Net Income | 140,000 | 240,000 | 71.43% | 140,000 | 340,000 | 142.86% |
Thus, the impact of sales increase have been calculated
Times Interest earned:
Times interest earned is used to assess the company's ability to meet its interest payment dues. The following formula is used to calculate the ratio.
Requirement 4:
The impact of sales decrease by 10% on each company's net income
Answer to Problem 5APSA
When sales decrease by 10%, the Net Income of Miller Company becomes $ 120,000 from $140,000 resulting in 14% decrease over previous profits. For Weaver Company the profit decreases from $ 140,000 to $100,000 resulting in 29% decrease over last profits.
Explanation of Solution
| Miller Company | Weaver Company | |||||
| Present | Decreased sales by 10% | Increase /(Decrease ) in %age | Present | Decreased sales by 10% | Increase /(Decrease ) in %age | |
| Sales | 1,000,000 | 900,000 | (10%) | 1,000,000 | 900,000 | (10%) |
| Variable Expenses | 800,000 | 720,000 | (10%) | 600,000 | 540,000 | (10%) |
| Income before Interest | 200,000 | 180,000 | (10%) | 400,000 | 360,000 | (10%) |
| Interest Expense (fixed) | 60,000 | 60,000 | 0% | 260,000 | 260,000 | 0% |
| Net Income | 140,000 | 120,000 | (14.29%) | 140,000 | 100,000 | (28.57%) |
Concept Introduction:
Times Interest earned:
Times interest earned is used to assess the company's ability to meet its interest payment dues. The following formula is used to calculate the ratio.
Requirement 5:
The impact of sales decrease by 40% on each company's net income
Answer to Problem 5APSA
When sales decrease by 40%, the Net Income of Miller Company becomes $ 60,000 from $140,000 resulting in 57% decrease over previous profits. For Weaver Company the profit decreases from $ 140,000 to loss of $20,000 resulting in 114% decrease over last profits.
Explanation of Solution
| Miller Company | Weaver Company | |||||
| Present | Decreased sales by 40% | Increase /(Decrease ) in %age | Present | Decreased sales by 10% | Increase /(Decrease ) in %age | |
| Sales | 1,000,000 | 600,000 | (40%) | 1,000,000 | 600,000 | (40%) |
| Variable Expenses | 800,000 | 480,000 | (40%) | 600,000 | 360,000 | (40%) |
| Income before Interest | 200,000 | 120,000 | (40%) | 400,000 | 240,000 | (40%) |
| Interest Expense (fixed) | 60,000 | 60,000 | 0% | 260,000 | 260,000 | 0% |
| Net Income | 140,000 | 60,000 | (57.14%) | 140,000 | (20,000) | (114.28%) |
Concept Introduction:
Times Interest earned:
Times interest earned is used to assess the company's ability to meet its interest payment dues. The following formula is used to calculate the ratio.
Requirement 6:
The company having the greater ability to pay interest expenses if sales was to decrease
Answer to Problem 5APSA
Explanation of Solution
Computation of times Interest earned when sales decline by 10% and 40 % respectively for each company
| Miller Company | Weaver Company | |||
| Decreased sales by 10% | Decreased sales by 40% | Decreased sales by 10% | Decreased sales by 40% | |
| Income before Interest | 180,000 | 120,000 | 360,000 | 240,000 |
| Interest Expense (fixed) | 60,000 | 60,000 | 260,000 | 260,000 |
| Times Interest Earned |
|
|
|
|
Hence, when sales decline by 10%, times interest earned of Miller is 3 whereas that of Weaver Company is 1.38. When sales decline by 40%, times interest earned of Miller is 2 whereas that of Weaver Company is 0.92
Hence, Miller Company always has higher times interest earned when compared to Weaver Company when sales are decreasing. This is considering the fact that Weaver Company have high fixed interest burden of $260,000 whereas the obligation of Miller Company is only $60,000
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