Question

The Spitfire Model Airplane Company has the following modified income statement ($000) at 100,000 units of production.

Revenue	$14,000
Variable Cost	6,500
Fixed Cost	6200
EBIT	$1,300
Interest(@10%)	500
EBT	$800
Tax (@40%)	320
EAT	$480
Number of shares	20,000

1. What are Spitfire's contribution margin and dollar breakeven point? Enter your contribution margin answer in decimals and not in percentage. Enter your break-even sales answer in whole dollars. For example, an answer of $1 thousand should be entered as 1,000, not 1. Do not round intermediate calculations.

   CM (to two decimal places)
   SB/E (to the nearest dollar)	$

2. Calculate Spitfire's current DFL, DOL, and DTL. Round the answers to two decimal places. Do not round intermediate calculations.

   DFL
   DOL
   DTL

3. Calculate the current EPS and estimate what it would become if sales declined by 25%. Use the DTL first and then recalculate the modified income statement. (Assume a negative EBT generates a negative tax.) Round your answers to two decimal places. Use a minus sign to indicate a negative answer. Do not round intermediate calculations.

   EPS (using DTL)	$
   EPS (using modified income statement)	$

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Answer 1

	Production = 100,000 Units
	Income Satement
	Particulars	Amount	Per Unit
A	Revenue	$     14,000,000	$        140
B	Variabe Cost	$       6,500,000	$          65
C	Contribution (A-B)	$       7,500,000	$          75
D	Fixed Cost	$       6,200,000
E	EBIT (C-D)	$       1,300,000
F	Interest (@10%)	$           500,000
G	EBT (E-F)	$           800,000
F	Tax (@40%)	$           320,000
G	EAT (G-F)	$           480,000
H	No. of Shares	20,000
i	EPS (G/H)	24

a.	Contribution Margin      =	Net sales - Variable Cost
	=	$       7,500,000
	Break Even Sales (in units) =	Fixed Cost/Contribution Margin per Unit
	=	$ 6,200,000/$ 75
	=	82,667
	Break Even Sales (in $) =	82,667 Unitis * $ 140 per Unit
	=	$     11,573,380

b.	Degree of Financial Leverage =	EBIT / EBT
	=	$ 1,300,000/$800,000
	DFL=	1.63
	Degree of Operating Leverage =	Contribution / EBIT
	=	$ 7,500,000/$ 1,300,000
	DOL =	5.77
	Degree of Total Leverage =	EBT/ Contribution
	DTL =	9.38

(c) EPS Using DTL = (DTL shows Percentage change in Earnings for a one percentage change in Sales)

For 25 % decrease in Sales, EPS will decrease by (9.375 % * 25 times) = 234%

EPS using DTL = $ 24 - ($ 24 * 234%) = -$ 32

	If Sales Declined by 25%
	Revised Sales = 100,000- 25% = 75,000
	Modified Income Satement
	Particulars	Amount
A	Revenue	$ 10,500,000	(75,000 * $ 140)
B	Variabe Cost	$   4,875,000	(75,000 * $ 65)
C	Contribution (A-B)	$   5,625,000
D	Fixed Cost	$   6,200,000
E	EBIT (C-D)	$     (575,000)
F	Interest (@10%)	$       500,000
G	EBT (E-F)	$ (1,075,000)
F	Tax (@40%)	$     (430,000)
G	EAT (G-F)	$     (645,000)
H	No. of Shares	20,000
i	EPS (G/H)	($ 32)

EPS using DCL will be same as EPS as per Modified Income Statement.