Question

Use the following information about Rat Race Home Security, Inc. to answer the questions: Average selling price per unit $338. Variable cost per unit $198 Units sold 303 Fixed costs $9,162 Interest expense 14,801 Based on the data above, what will be the resulting percentage change in earnings per share of Rat Race Home Security, Inc. if they expect operating profit to change 3.2 percent? (You should calculate the degree of financial leverage first). (Write the percentage sign in the "units" box). Round the answer to two decimals

Answer 1

EBIT = (Selling price * units sold) - (Variable cost per unit * units sold) - fixed cost
= ($338 * 303) - ($198 * 303) - $9,162
= $102,414 - $59,994 - $9,162
= $33,258.

Degree of financial leverage = EBIT / (EBIT - Interest expense)
= $33,258 / ($33,258 - $14,801)
= 1.8019

Percentage change in EPS = 1.8019 * 3.2% = 5.7661%

Percentage change in EPS = 5.77%