Question

The Poseidon Swim Company produces swim trunks. The average selling price for one of their swim trunks is $71.37. The variable cost per unit is $21.20, Poseidon Swim has average fixed costs per year of $6,880. Assume that current level of sales is 317 units. What will be the resulting percentage change EBIT if they expect units sold to change by 6.2 percent.

Answer 1

We should calculate the degree of operating leverage first:

The Degree of operating leverage is :

Q(P - V )/ [Q(P - V ) - FC]

Where,

Q = NUMBER OF UNITS SOLD

P = PRICE PER UNIT

V = VARIABLE COSTS

FC= FIXED COSTS

sales is 317 units,

317 ( $71.37 - $21.2)/ [317 ( $71.37 - $21.2) - $6,880]

= $15,309.89/$9023.89

= 1.6966

since,

DOL = % change in EBIT / % changes in sales.

The EBIT is expected to change by

= 1.6966 *6.2%

=10.52%( rounded off to two decimal places)