Question

Melty Muffins Inc. has sales of $600mm this year. It has a 30% gross margin and fixed costs (including depreciation) of $80mm. It paid interest of $16mm and taxes of $24mm. If sales go up 15% next year, by what percentage will EBIT increase?

a. 45%

b. 18%

c. 0%

d. 27%

e. 15%

Answer 1

option (d) i.e. 27% is the correct answer.

Particulars	Current Year	Next Year
Sales	$600.00	$690.00
Gross Profit @30% of sales	$180.00	$207.00
Less: Fixed Cost and Depreciation	$80.00	$80.00
EBIT	$100.00	$127.00

NOTE: Fixed cost and depreciation expense will remain same for the next year also because fixed costs do not change year after year.

STEP 1- If sales increases by 15%, new saes will be computed as follows-

New sales = old sales * (1.15) = $600*1.15 = $690

STEP 2-Gross profit at the rate of 30% on sales will be as follows-

Gross profit = New sales * 0.30 = $690*0.30 = $207

STEP 3- New EBIT will be computed as follws-

New EBIT= New sales- New Gross profit - Fized cost and depreciation

New EBIT = $690 -$ 207 - $80 = $127

CALCULATION OF PERCENTAGE INCREASE IN EBIT -

Percntage increase in EBIT =

Percntage increase in EBIT =

Percntage increase in EBIT = 27%

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