The following information pertains to the Classic Burger Restaurant chain:
Sales $600,000
Variable costs 300,000
Total contribution margin 300,000
Fixed costs 100,000
EBIT 200,000
Interest expense 50,000
Earnings before taxes 150,000
Taxes (30%) 45,000
Net income $105,000
a. If sales increase by 10%, what will be the new level of EPS if the firm has 100,000 shares outstanding?
b. What is the percentage increase in EPS? Explain the difference between the percentage increase in sales and
the percentage increase in EPS.
a.
Sales $600,000 × 1.1 = $660,000
Variable costs 300,000 × 1.1 = 330,000
Total contribution margin 300,000 330,000
Fixed costs 100,000 100,000
EBIT 200,000 230,000
Interest expense 50,000 50,000
Earnings before taxes 150,000 180,000
Taxes (30%) 45,000 54,000
Net income $105,000 $126,000
Earnings Per Share $10.50 $12.60
b. ($12.60 - $10.50)/$10.50 = .20 or 20%; A 10% increase in sales results in a 20% increase in EPS due to leverage.
Classic Burger uses both operating leverage (fixed cost of operations) and financial leverage (debt financing reflected in
interest expense).
You might also like to view...
All of the following groups are included in the diffusion of innovation curve except
A. late majority. B. early adopters. C. nonadopters. D. early majority. E. innovators.
We can track inventory accuracy by ______.
a. calculating the mean absolute deviation between the quantity shown in inventory records and the real quantity that is physically available b. calculating the difference between production records and sales records c. counting each unit after each manufacturing cycle d. counting units left in inventory after the sale of each unit
Explain the difference between independent and dependent demand and illustrate your explanation with an example
What will be an ideal response?
Answer the following statement(s) true (T) or false (F)
Creativity cannot be developed or improved.