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Calculating EBIT and DOL in the given case

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Use the following data to construct an income statement for Cheryl's posters:
Sales price $20 per unit
Variable Cost $10 per unit
Fixed costs $5,000
Sales in Units 1,000

1. Calculate the Earnings before Interest and Taxes (EBIT) for Cheryl's Posters using the data provided above.
2. Prepare two pro forma income statements assuming:
a 50% increase in sales (1,500)
a 50% decrease in sales (500)
3. What is the impact on earnings before interest and taxes (EBIT) of the 50% increase/decrease in sales?
4. Explain using the concept of leverage.

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Please refer attached file for better formating and missing formulas.

1. Calculate the Earnings before Interest and Taxes (EBIT) for Cheryl's Posters using the data provided above.

Fixed Costs=F=$5,000
Variable Cost per unit=VC=$10
Sales=Q=1000
Sales Price=P=$20
Total Cost=TC=F+VC*Q=$15,000
Total Revenue=TR=P*Q=$20,000

EBIT=TR-TC=$5,000

2. Prepare two pro forma income statements assuming:
a 50% increase in sales (1,500)
a 50% decrease in sales (500)

Cheryls Posters
Pro Forma Income ...

Solution Summary

Solution depicts the steps to calculate EBIT and degree of operating leverage in the given case.

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Degree of operating leverage

Grey Products has fixed operating costs of $380,000, variable operating costs of $16 per unit, and a selling price of $63.50 per unit.
a. Calculate the operating break even point in units.
b. Calculate the firm's EBIT at 9,000, 10,000, and 11,000 units, respectively.
c. With 10,000 units as a base, what are the percentage changes in units sold and EBIT as sales move from the base to the other sales levels used in part b?
d. Use the percentages computed in part c to determine the degree of operating leverage (DOL).
e. Use the formula for degree of operating leverage to determine the DOL at 10,000 units.

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