Question on operating leverage

Business & Finance
Tutor: None Selected Time limit: 1 Day

The Poseidon Swim company produces swim trunks. The average is $77.47, variable cost per unit is $23.47, the average fixed cost is $5,267.

Assume that current level is 390 units. What will be the resulting percentage change in EBIT if they expect units sold to change by -4.4% (You should calculate the degree of operating leverage first).

Oct 3rd, 2015

Thank you for the opportunity to help you with your question!

  Units
Units sold 390 372.84
Sales = units x $77.47 $30,213.30 $28,883.91
Less: Variable Cost = Units x $23.47 -$9,153.30 -$8,750.55
Contribution Margin $21,060.00 $20,133.36
Less: Fixed Cost -$5,267.00 -$5,267.00
EBIT $15,793.00 $14,866.36
Change in EBIT = ($14,866.36-$15,793)/$15,793 -5.87%
Units Changed = 390 x (1-4.4%) $372.84

Please let me know if you need any clarification. I'm always happy to answer your questions.
Oct 3rd, 2015

My professor came up with -5.90. I'm trying to figure out how she got this number. Yours is really close.

Oct 3rd, 2015

Units $390
Degree of operating Leverage = Fixed cost/(Total Cost) 36.52%
Degree of operating Leverage = Change in EBIT/ Change in sales
37% = change in EBIT/-4.4%
Change in EBIT -1.61%
change in EBIT.xlsx

Oct 3rd, 2015

I think your professor rounded to -5.90.I am uploading the file.

please ignore last file uploaded .change in EBIT.xlsx

Oct 3rd, 2015

oh okay. Thank you!! Could you help me with the other questions I posted? 

Oct 3rd, 2015

yeah sure ,,,please add me as your tutor

Oct 3rd, 2015

yeah sure ,,,please add me as your tutor

Oct 3rd, 2015

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