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9 September, 21:25

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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  1. 9 September, 23:07
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    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.
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