Question: A firm has sales of $10 million, variable costs of $4 million, fixed e

Question

Question: A firm has sales of $10 million, variable costs of $4 million, fixed expenses of $1.5 million, interest costs of $2 million, and a 30 percent average tax rate. a. Compute its DOL, DFL, and DCL. DOL = (S – VC)/(S – VC – FC) = DFL = EBIT/(EBIT – I) DCL = b. What will be the expected level of EBIT and net income if next year’s sales rise 10 percent? EBIT will rise NI will rise c. What will be the expected level of EBIT and net income if next year’s sales fall 20 percent? EBIT will fall NI will fall Question: A firm has sales of $10 million, variable costs of $4 million, fixed expenses of $1.5 million, interest costs of $2 million, and a 30 percent average tax rate. a. Compute its DOL, DFL, and DCL. DOL = (S – VC)/(S – VC – FC) = DFL = EBIT/(EBIT – I) DCL = b. What will be the expected level of EBIT and net income if next year’s sales rise 10 percent? EBIT will rise NI will rise c. What will be the expected level of EBIT and net income if next year’s sales fall 20 percent? EBIT will fall NI will fall

Explanation / Answer

DOL = (10-4) / (10-4-1.5) = 6/4.5 = 1.33

DFL = 4.5 / (4.5 -2) = 4.5 / 2.5 = 1.80

DCL = DOL * DFL = 1.33 * 1.80 = 2.4

When Sales Rise 10%

% change In EBIT = DOL * % change in sales = 1.33 * 10% = 13.33%

% change in NI = DCL * % change in sales = 2.4 * 10% = 24%

When Sales Fall 20%

% change In EBIT = DOL * % change in sales = 1.33 * 20% = - 26.66%

change in NI = DCL * % change in sales = 2.4 * 20% = - 48%

Related Questions

Navigate

• Browse (All)
• Browse Q
• Subjects

---

---

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.