Geniune Motor Products

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1) GENUINE MOTOR PRODUCTS Revised Pro forma Income Statement For 2007 Sales (1,000,000 units @ $30 per unit) Fixed costs Total variable costs (1,000,000 units @ $18.80 per unit) Operating Income (EBIT) Interest (10.75% x $12,000,000) Earnings before taxes Taxes (35%) Earnings after taxes Shares Earnings per share * Fixed costs include $2,800,000 in depreciation $ 30,000,000 5,800,000 18,800,000 5,400,000 1,290,000 4,110,000 1,438,500 2,671,500 2,320,000 1.15

$ $ $

2) Although there is more shares, the Earnings after taxes are now higher due to the lower variable costs, which compensates for the increase in earnings based on the same 1,000,000 units at $30. Also the bigger part of the 14M invested, 10M was financied with issuing of bonds, so the amoutn of shares oustanding did not increase a lot to affect the earnings per share (which is calculated based on the amount of shares outstanding). 3) Equation 5-3 DOL= Q(P-VC) Q(P-VC)-FC EBIT EBIT - I Q(P-VC) Q(P-VC)-FC-I After Changes (figure 4) Q P VC FC EBIT I DOL= DFL= DCL= 4) Equation 5-1 BE= FC P-VC $ $ $ $ $ 1,000,000 30 25 2,000,000 3,000,000 215,000 1.67 1.08 1.80 Q P VC FC EBIT I DOL= DFL= DCL= $ $ $ $ $ 1,000,000 30 18.80 5,800,000 5,400,000 1,290,000 2.07 1.31 2.73

Equation 5-5

DFL=

Equation 5-7

DCL=

Before Changes (figure 2)

Before Changes (figure 2) BE= $ 2,000,000 $ 30 - $ 25 400,000 units

After Changes (figure 4) BE= $ 5,800,000 $ 30 - $ 18.80 517,857 units 5,800,000.00 check

5) Revised Equation

BE=

(FC - Depreciation)+ I P - VC

Before Changes (figure 2) BE= (2,000,000-1,000,000)+215,000 $ 30 - $ 25 243,000 units 1,215,000.00 check

After Changes (figure 4) BE= (5,800,000-2,800,000)+1,290,000 $ 30 - $ 18.80 383,036 units 4,290,000.00 check

6) We agree with Harry, beacsue taking into consideration that after the changes the companye needs to cover to be able to cover its fixed expenses of $ 4,290,000 (actual cash outflow). In order to be able to cover these...
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