The following balance sheet and income statement should be used: The proﬁt margin, the debt-equity ratio, and the dividend payout ratio are constant. Sales are expected to increase by $4,624 next year. What is the projected addition to retained earnings for
Next year?
A) $229.44
B) $1,108.96
C) $1,663.44
D) $2,241.41
E) $2,772.40

Question

The following balance sheet and income statement should be used:   The proﬁt margin, the debt-equity ratio, and the dividend payout ratio are constant. Sales are expected to increase by $4,624 next year. What is the projected addition to retained earnings for
Next year?
A) $229.44 
B) $1,108.96 
C) $1,663.44 
D) $2,241.41 
E) $2,772.40

Quizplus · Accepted Answer

To calculate the projected addition to retained earnings, we need to use the formula:

Net Income - Dividends = Addition to Retained Earnings

We are told that the profit margin, debt-equity ratio, and dividend payout ratio are constant. Therefore, we can use the current net income and dividends figures to calculate the addition to retained earnings.

Current net income = $3,081 
Dividends = $1,076

Net income - dividends = $2,005

Therefore, the current addition to retained earnings is $2,005.

We are then told that sales are expected to increase by $4,624 next year. We need to calculate the new net income figure based on this increase in sales.

Current sales = $24,175 
Increase in sales = $4,624 
New sales = $28,799

To calculate the new net income, we multiply the new sales figure by the constant profit margin:

New net income = $28,799 x 0.123 = $3,541.08

Finally, we can calculate the projected addition to retained earnings for next year using the same formula as before:

New net income - dividends = Addition to retained earnings

$3,541.08 - $1,076 = $2,465.08

Therefore, the projected addition to retained earnings for next year is $2,465.08.
 
The closest option to this value is option C, which is $1,663.44. However, this is not the correct answer. The correct answer is found to be $2,465.08.

The Following Balance Sheet and Income Statement Should Be Used