Question

ACME, Inc. reported the following income statement for 2009:

Sales	$2,500,000
Variable Costs	900,000
Fixed Operating Costs	700,000
EBIT	900,000
Interest Expense	200,000
EBT	700,000
Taxes (30%)	210,000
Net Income	$490,000
Earnings Per Share	$4.90

If ACME's sales next year increase by 20%, what will ACME's earnings per share be?

show work so i can understand how you got each answer

Answer 1

Variable Cost Ratio

Variable Cost Ratio = [Total Variable Costs / Sales] x 100

= [$900,000 / $25,00,000] x 100

= 36%

Number of shares outstanding

Number of shares outstanding = Net Income / Earnings per share

= $490,000 / $4.90 per share

= 100,000 Common Shares Outstanding

Income Statement for calculating the Earnings per share if the sales increased by 20%

Sales [$25,00,000 x 120%]	$30,00,000
Variable Costs [$30,00,000 x 36%]	10,80,000
Fixed Operating Costs	700,000
EBIT	12,20,000
Interest Expense	200,000
EBT	10,20,000
Taxes (30%)	306,000
Net Income	714,000
Earnings Per Share [$714,000 / 100,000 Shares]	$7.14 per share

“Therefore, ACME's earnings per share will be $7.14 per share”