Question
In: Finance
The Spitfire Model Airplane Company has the following modified income statement ($000) at 100,000 units of...
The Spitfire Model Airplane Company has the following modified income statement ($000) at 100,000 units of production.
| Revenue | $16,000 |
| Variable Cost | 6,100 |
| Fixed Cost | 8600 |
| EBIT | $1,300 |
| Interest(@10%) | 500 |
| EBT | $800 |
| Tax (@40%) | 320 |
| EAT | $480 |
| Number of shares | 20,000 |
- 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) $ - Calculate Spitfire's current DFL, DOL, and DTL. Round the
answers to two decimal places. Do not round intermediate
calculations.
DFL DOL DTL - 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) $
Solutions
Expert Solution
Ans.
| Sales | $ 16,000.00 |
| Less : Variable Cost | $ (6,100.00) |
| Contribution | $ 9,900.00 |
| Less: Fixed Cost | $ (8,600.00) |
| EBIT | $ 1,300.00 |
| Less : Interest | $ (500.00) |
| EBT | $ 800.00 |
| Less : Taxes | $ (320.00) |
| Net Income | $ 480.00 |
a)
Contribution Margin = Contribution / Sales = $ 9,900 / $ 16,000 = 0.61875 = 0.62
Break Even Sales ( Dollars) = Fixed Cost / Contribution margin = $8,600 / 0.61875 = $ 13,899
b)
Degree of Financial Leverage = EBIT / EBT = $ 1,300 / $800 = 1.625 or 1.63
Degree of Operating Leverage = Contribution / EBIT = $ 9,900 / $ 1,300 = 7.61538 or 7.62
Degree of Total Leverage = DOL * DFL = Contribution / EBIT * EBIT / EBT = Contribution / EBT = $ 9,900 / 800 = 12.375.
c)
Current EPS = Net Income / Number of Shares = $ 480 / 20,000 = 0.024
If sales declined by 25%
EPS (Using DTL) = 309.375% [( DTL * 25% ) = 12.375 * 25%] decrease in EPS i.e $ 0.024 - 309.375% = - $ 0.05025
EPS (using modified income statement)
| Current Forecast | If Sales are Percent 25% Lower Deviation | ||
| Sales | $ 16,000.00 | $ 12,000.00 | -25% |
| Less : Variable Cost | $ (6,100.00) | $ (4,575.00) | -25% |
| Gross Profit | $ 9,900.00 | $ 7,425.00 | -25% |
| Less: Fixed Cost | $ (8,600.00) | $ (8,600.00) | 0% |
| EBIT | $ 1,300.00 | $ (1,175.00) | -190% |
| Less : Interest | $ (500.00) | $ (500.00) | 0% |
| EBT | $ 800.00 | $ (1,675.00) | -309.375% |
| Less : Taxes | $ (320.00) | $ 670.00 | -309.375% |
| Net Income (a) | $ 480.00 | $ (1,005.00) | -309.375% |
| Number of Shares (b) | 20,000.00 | 20,000.00 | |
| EPS (a / b) | 0.024 | -0.05025 | -309.375% |
EPS (using modified income statement) = - $ 0.05025
jeff jeffy answered 1 year agoRelated Solutions
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