Coats Corp.generates $10,000,000 in sales.Its variable costs equal 85% of sales and its fixed costs are $500,000.Therefore,the company's operating income (EBIT)equals $1,000,000.The company estimates that if its sales were to increase 10%,its net income and EPS would increase 17.5%.What is the company's interest expense?
A)$122,482
B)$128,929
C)$135,714
D)$142,857
E)$150,000

Question

Quizplus · Accepted Answer

The operating income (EBIT) is $1,000,000. With a 10% increase in sales, the new sales would be $11,000,000. Variable costs would be 85% of $11,000,000, which is $9,350,000. Fixed costs remain $500,000. The new EBIT would be $11,000,000 - $9,350,000 - $500,000 = $1,150,000. The increase in EBIT is $150,000. Given that net income and EPS increase by 17.5%, the interest expense must be $142,857 to account for the difference between the increase in EBIT and the increase in net income.