Question

Haunted Forest, Inc.is selling fog machines.

Use the following information about Haunted Forest, Inc. to answer the following questions.

Average selling price per unit $322.

Variable cost per unit $198

Units sold 400

Fixed costs $15,062

Interest expense $3,305

Based on the data above, what will be the resulting percentage change in earnings per share if they expect units produced and sold to change 0.4 percent?

Answer 1

Contribution margin per unit = Selling price per unit - Variable cost per unit
Contribution margin per unit = $322 - $198
Contribution margin per unit = $124

Contribution margin = Contribution margin per unit * Units sold
Contribution margin = $124 * 400
Contribution margin = $49,600

Operating income = Contribution margin - Fixed costs
Operating income = $49,600 - $15,062
Operating income = $34,538

Taxable income = Operating income - Interest expense
Taxable income = $34,538 - $3,305
Taxable income = $31,233

Degree of combined leverage = Contribution margin / Taxable income
Degree of combined leverage = $49,600 / $31,233
Degree of combined leverage = 1.588

Degree of combined leverage = % change in EPS / % change in sales
1.588 = % change in EPS / 0.40%
% change in EPS = 0.64%