P13-8 EBIT sensitivity Millard\'s Enterprises sells wooden baby chairs for S rs

Question

P13-8 EBIT sensitivity Millard's Enterprises sells wooden baby chairs for S rs for $28 r xe ap 2 chair. The fixed operating costs are $23,000, and the variable operati chair. a. Calculate Millard's Enterprises' EBIT with an estimated sales quantit operating cost is ter chi cost is $18 per chairs. b. Calculate EBIT for sales of 10,000 and 14,000 chairs, respectively c. Calculate the percentage changes in units sold (with 12,000 chairs as the bas level) and related percentage changes in EBIT when sales are 10,000 and chairs, respectively 14000 d. Based on the answer in part c, comment on the sensitivity of changes in EBIT nse to changes in sales.

Explanation / Answer

Earnings before Interest and Taxation (EBIT) would be calculated as follows -

EBIT = (Selling price per unit - Variable cost per unit) x no. of units sold - Fixed Costs

a) 12000 units

EBIT = ($28 - $18) x 12000 - $23000 = $97000

b) 10000 units

EBIT = ($28 - $18) x 10000 - $23000 = $77000

14000 units

EBIT = ($28 - $18) x 14000 - $23000 = $117000

c) 10000 units

Percentage change in units = [(10000 - 12000) / 12000] x 100 = (-)16.66666666 % or (-)16.67 %

There is a decrease of 16.67% in no. of units sold.

Percentage change in EBIT = [($77000 - $97000) / $97000] x 100 = (-)20.618556701 % or (-)20.62 %

So, a decrease of 20.62%.

14000 units

Percentage change in units = [(14000 - 12000) / 12000] x 100 = 16.66666666 % or 16.67 %

There is an increase of 16.67% in no. of units sold.

Percentage change in EBIT = [($117000 - $97000) / $97000] x 100 = 20.618556701 % or 20.62 %

There is an increase of 20.62%.

d) When no. of units sold decrease by 16.67%, EBIT decreases by 20.62%. And, if no. of units sold increase by 16.67%, EBIT increases by 20.62%. So, we can say that -

16.67% change in no. of units sold = 20.62% change in EBIT

While both of them moving in the same direction. So, when no. of units sold change by 1%, change in EBIT is -

Change in sales = 20.618556701 / 16.66666666 = 1.23711340255 % or 1.24%

In short, 1% change in no. of units sold changes EBIT by 1.24%.

Related Questions

Navigate

• Browse (All)
• Browse P
• Subjects

---

---

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