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 $333.

Variable cost per unit $212

Units sold 389

Fixed costs $16,607

Interest expense $3,358

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 2.6 percent?

Answer 1

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

Contribution margin = 389 * ($333 - $212)

Contribution margin = $47,069

EBT = Contribution margin - Fixed costs - Interest expense

EBT = $47,069 - $16,607 - $3,358

EBT = $27,104

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

Degree of total (combined) leverage = $47,069 / $27,104

Degree of total (combined) leverage = 1.7366

Percentage change in earnings per share if they expect units produced and sold to change 2.6 percent = 1.7366 * 2.6% = 4.52%