Question

Given the following information: sales = $450, costs = $350, tax rate = 34%, retention ratio = 30%, production = 95% of capacity,sales increase = 10%. What is the expected addition to retained earnings? (Assume costs change directly with sales.) 1.98 11.22 19.8 21.78 50.82

Answer 1

Answer:

The correct option is (c) 21.78

Explanation:

Given:

Sales = $450

Costs = $350

Increased sales = 450×1.1 = $495

Increased cost (in the same proportion) = 350×1.1 = $385

EBIT = Sales - cost

        = 495 - 385

        = $110

EAT = 110×(1-0.34)

       = $72.60

Retention Ratio = 30%

Addition to retained earnings = EAT × retention ratio

                                              = 72.6 ×0.3

                                              = $21.78

Therefore, addition to retained earnings is $21.78.