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

Question

Business

Felicity Dickerson

7 March, 18:37

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

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Answers (1)

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Derek · Answer 1

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.