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.

jeff jeffy answered 3 months ago

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