Question
In: Finance
In 20X5 MyEducator had sales of $5,521 (in millions), EBIT of $1,720 (in millions), and net...
In 20X5 MyEducator had sales of $5,521 (in millions), EBIT of $1,720 (in millions), and net income of $528 (in millions). Its DOL, DFL, and DCL are 3.21, 3.26 and 10.46, respectively. If the sales decreases to $5,200 (in millions) in 20X6, what is the earnings before interest and taxes of MyEducator in 20X6?
A)$1,399
B)$674
C)$1,394
D)$1,775
E)$2,041
Solutions
Expert Solution
| Degree of operating leverage is used to calculate the percentage change in operating income when sales changes by certain percentage. | ||||||||
| Calculation of % change in sales | ||||||||
| % change in sales = (Current year sales - Previous year sales)/Previous year sales | ||||||||
| % change in sales | ($5,200-$5,521)/5,521 | |||||||
| % change in sales | -5.81% | |||||||
| The sales of company has decrease and so operating income will also decrease. | ||||||||
| Calculation of % decrease in operating income | ||||||||
| % decrease in operating income | % change in sales*DOL | |||||||
| % decrease in operating income | 5.81%*3.21 | |||||||
| % decrease in operating income | -18.66% | |||||||
| Calculation of earnings before interest and taxes for 20X6 | ||||||||
| Earnings before interest and taxes | EBIT of 20X5*(1-% decrease in operating income) | |||||||
| Earnings before interest and taxes | 1720*(1-0.1866) | |||||||
| Earnings before interest and taxes | $1,399 | |||||||
| Thus, the earnings before interest and taxes in 20X6 is $1,399. | ||||||||
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