Bell Brothers has $3,000,000 in sales. Its fixed costs are estimated to be $100,000, and its variable costs are equal to fifty cents for every dollar of sales. The company has $1,000,000 in debt outstanding at a before-tax cost of 10 percent. If Bell Brothers' sales were to increase by 20 percent, how much of a percentage increase would you expect in the company's net income?
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A. B. C. D. E.D
Step 1 Find Degree of Total Leverage (DTL)
DTL = (S-VC)/(S-VC-F-I) = ($3,000,000-$1,500,000)/($3,000,000-$1,500,000-$100,000-$100,000 = 1.1538.
Step 2 Find percentage increase in net income:
%Change NI = (0.20)(DTL) = (0.20)(1.1538) = 0.2308 = 23.08%.