Question

The Poseidon Swim Company produces swim trunks. The average selling price for one of their swim trunks is $76.15. The variable cost per unit is $24.52, Poseidon Swim has an average fixed cost per year of $6,922. Assume that the current level of sales is 421 units. What will be the resulting percentage change in EBIT if they expect units sold to change by 1.1 percent? (You should calculate the degree of operating leverage first).

Round the answer to two decimal places.

Answer 1

Step-1, Calculation of Degree of Operating Leverage

Income Statement
Sales [421 units x $76.15 per unit]	$32,059.15
Less: Variable Costs [421 x $24.52 per unit]	$10,322.92
Contribution Margin	$21,736.23
Less: Fixed Costs	6,922.00
Net Operating Income	$14,814.23

Degree of Operating Leverage = Contribution Margin / Net Operating Income

= $21,736.23 / $14,814.23

= 1.4673

Step-2, Percentage change EBIT

Percentage change EBIT = Degree of Operating Leverage x Percentage change in sales

= 1.4673 x 1.10%

= 1.61%

“If the sales changed by 1.10 Percent, then the Earnings Before Interest & Tax (EBIT) will change by 1.61%. Hence, the answer would be 1.61%”