EBIT Sensitivity Stewart Industries sells its finished product for $8.44 per uni
ID: 2797312 • Letter: E
Question
EBIT Sensitivity Stewart Industries sells its finished product for $8.44 per unit Its fixed operating costs are $20,500, and the variable operating cost per unit is $5.73. a. Calculate the firm's earnings before interest and taxes (EBIT) for sales of 11,000 units. b. Calculate the firm's EBIT for sales of 10,000 and 12,000 units, respectively. c. Calculate the percentage changes in sales (from the 11,000-unit base level and associated percentage changes in EBIT for the shifts in sales indicated in part (b) d. On the basis of your findings in part (c), comment on the sensitivity of changes in EBIT in response to changes in sales. a. The firm's earnings before interest and taes is (Round to the nearest dollar) b. The EBIT for the 10,000 units level is $. (Round to the nearest dollar.) The EBIT for the 12,000 units level is $1-(Round to the nearest dollar) C. The change in sales as a percentage for the 10,000 units level is 96. (Round to one decimal place.) The change in sales as a percentage for the 12,000 units level is .96. (Round to one decimal place.) The change in EBIT as a percentage for the 10,000 units level is 1-196. (Round to one decimal place.) The change in EBIT as a percentage for the 12,000 units level is %. (Round to one decimal place.) d. On the basis of your findings in part (c), comment on the sensitivity of changes in EBIT in response to changes in sales. (Select the best answer below.) 0 A. EBIT is less sensitive to changing sales levels, it increases/decreases half as much as sales. B. Changes in sales have no effect on EBIT as long as the costs are the same. 0 C. EBIT is more sensitive to changing sales levels, it increases/decreases about twice as much as sales. 0 D. EBIT and sales are equally sensitive to changing sales levels, they increase/decrease the same as sales.Explanation / Answer
(a)
Stewart Industry
Product Price Cost = $8.44 per Unit
Variable Cost = $5.73 per Unit
The Fixed Opeating Cost = $20,500
Profit Margin Per Unit = 8.44 - 5.73 = 2.71
Total Profit for 11,000 units = 11,000*2.71 = 29,810
Net Income = 29,810 - 20,500 = 9,310
Since, interest rates and tax rates are not mentioned, so assumed Interest and Tax are 0.
EBIT = $9,310
(b)
EBIT for selling 10,000 units
EBIT = 2.71*10,000 = 27100 - 20,500 = 6,600
EBIT for selling 12,000 units
EBIT = 2.71*12,000 = 32,520- 20,500 = 12,020
(c)
Change of Sale from 11,000 to 10,000
% Change = 11,000 - 10,000 = (1,000/11,000)*100 = 9.1% down side change
% Change EBIT = (9,310 - 6,600)*100/9310 = 29.1% down side change
Change of Sale from 11,000 to 12,000
% Change = 12,000 - 11,000 = (1,000/11,000)*100 = 9.1% up side change
% Change EBIT = (12020 - 9310)*100/9310 = 29.1% up side chang
The sensitivity of +/- 29.1% in EBIT in response of change of sale of +/- 9.1%.
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