Haunted Forest, Inc.is selling fog machines. Use the following information about

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 $307.

Variable cost per unit $218

Units sold 368

Fixed costs $17,886

Interest expense $3,431

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 7.3 percent?

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

Round the answer to two decimals

Explanation / Answer

Degree of Total Leverage = Units sold * (Average selling price per unit - Variable cost per unit) / [Units sold * (Average selling price per unit - Variable cost per unit) - Fixed costs - Interest expense]

= 368 * ($307 - $218) / [368 * ($307 - $218) - $17,886 - $3,431]

= 2.86

So, if the expected units sold changes by 7.3%, then the earnings per share would change by 20.91% (= 7.3% * 2.86)

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