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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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Solution Summary

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

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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 provided by:
Lokesh Jain, MSc
Education
  • BEng (Hons) , Birla Institute of Technology and Science, India
  • MSc (Hons) , Birla Institute of Technology and Science, India
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