Question

Haunted Forest, Inc.is selling fog machines. Use the following information about Haunted Forest, Inc. to answer the following questions. Average selling price per unit $330. Variable cost per unit $196 Units sold 311 Fixed costs $17,338 Interest expense $4,693 Based on the data above, what will be the resulting percentage change in earnings per share if they expect units produced and sold to change -4.6 percent?

Answer 1

Please refer to below spreadsheet for calculation and answer. Cell reference also provided.

D E F G 311 Sold Units Sale per unit Variable cost per unit After change in sales 296.69 330.00 196.00 $330.00 $196.00 Partial Income Statement Revenue Variable cost Fixed cost EBIT Interest expenses EBT $102,630.00 $60,956.00 $17,338.00 $24,336.00 $4,693.00 $19,643.00 $97,909.02 $58,152.02 $17,338.00 $22,419.00 $4,693.00 $17,726.00 14 15 16 Degree of financial leverage (DFL) 1.24 DFL = EBIT/EBT % change in Sale -4.60% Or % change in EBIT -7.88% DFL = % change in EPS/% change in EBIT % change in Earning per Share (EPS) -9.76%

Cell reference -

Sold Units Sale per unit Variable cost per unit 311 330 After change in sales =C2*(1+C18) =C3 =C4 3 196 6 Partial Income Statement 1 8 10 11 Revenue Variable cost Fixed cost EBIT Interest expenses EBT =C2 C3 =C2*C4 17338 =C8-C9-C10 4693 =C11-C12 =D2*D3 =D2*D4 17338 =D8-D9-D10 4693 =D11-D12 13 14 15 Degree of financial leverage (DFL) =C11/C13 DFL = EBIT/EBT 17 18 % change in Sale -0.046 or 19 % change in EBIT =D11/C11-1 DFL = % change in EPS/% change in EBIT % change in Earning per Share (EPS) =C16*C20

Please note: Sales units are not rounded off ( after -4.6% change in sales). If we round off it to whole number then % change in EPS would be -9.55%.

Hope this will help, please do comment if you need any further explanation. Your feedback would be highly appreciated.