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 $338.

Variable cost per unit $215

Units sold 332

Fixed costs $16,002

Interest expense $3,120

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 -4.1 percent?

(You should calculate the degree of total (combined) leverage first).

(Write the percentage sign in the "units" box).

Round the answer to two decimals

Answer 1

Answer:

Degree of Combined Leverage = [Q*(P-v)] / [Q*(P-V) – Fixed Cost – Interest]
Degree of Combined Leverage = [332 * ($338 - $215)] / [332 *($338 - $215) - $16,002 - $3,120]
Degree of Combined Leverage = [332 * $123] / [$40,836 - $16,002 - $3,120]
Degree of Combined Leverage = $40,836 / $21,714
Degree of Combined Leverage = 1.88

Percentage change in Earnings per share = Degree of Combined Leverage * -4.1%
Percentage change in Earnings per share = 1.88 * -4.1%
Percentage change in Earnings per share = -7.71%