Question

Use the following information about Rat Race Home Security, Inc. to answer the questions:

Average selling price per unit $349.

Variable cost per unit $196

Units sold 415

Fixed costs $9,827

Interest expense 19,794

Based on the data above, what will be the resulting percentage change in earnings per share of Rat Race Home Security, Inc. if they expect operating profit to change 7.4 percent?

(You should calculate the degree of financial leverage first).

Answer 1

Particular	Amount
Sales (415 * 349)	144835
Variable Cost (415 * 196)	81340
Operating Profit (Sales - Variable Cost)	63495
Fixed Cost	9827
EBIT (Operating Profit - Fixed Cost)	53668
Interest	19794
DEGREE OF FINANCIAL LEVERAGE	=	EBIT / (EBIT - Interest)
DEGREE OF FINANCIAL LEVERAGE	=	53668 / (63668-19794)
DEGREE OF FINANCIAL LEVERAGE	=	1.584
Change in Earning Per Share	=	% change in EBIT * Degree of Financial Leverage
Change in Earning Per Share	=	7.4   *   1.58
Change in Earning Per Share	=	11.69%