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 $329.

Variable cost per unit $206

Units sold 312

Fixed costs $15,370

Interest expense $3,287

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 -4.6 percent?

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

Round the answer to two decimals.

Answer 1

Contribution margin = Units sold * (Average selling price - Variable cost per unit)

Contribution margin = 312 * ($329 - $206)

Contribution margin = $38,376

EBT = Contribution margin - Fixed costs - Interest expense

EBT = $38,376 - $15,370 - $3,287

EBT = $19,719

Degree of total (combined) leverage = Contribution margin / EBT

Degree of total (combined) leverage = $38,376 / $19,719

Degree of total (combined) leverage = 1.94614

Percentage change in earnings per share if they expect units produced and sold to change -4.6 percent = 1.94614 * -4.6% = -8.95%