A corporation reports sales of $4,000,000, variable costs of $500,000, fixed ope

Question

A corporation reports sales of $4,000,000, variable costs of $500,000, fixed operating costs of $1,250,000, and interest expense of $350,000. The corporation's EBIT is $2,250,000 and its marginal tax rate is 30%. If the corporation is able to increase its sales by 25%, then

A) its EBIT will increase by 25% and its EPS will increase by 25%.

its EBIT will increase by more than 25% and its EPS will increase by less than 25%.

C) its EBIT and EPS will both increase, but less than 25% due to fixed costs and taxes.

its EBIT will increase by more than 25% and its EPS will increase by more than the percentage increase in EBIT.

A) its EBIT will increase by 25% and its EPS will increase by 25%.

its EBIT will increase by more than 25% and its EPS will increase by less than 25%.

C) its EBIT and EPS will both increase, but less than 25% due to fixed costs and taxes.

its EBIT will increase by more than 25% and its EPS will increase by more than the percentage increase in EBIT.

Explanation / Answer

Incremental Income Statement Incremental Sales $    4,000,000.00 100% $ 1,000,000.00 Less: Variable Cost $        500,000.00 12.50% $      125,000.00 Contribution $    3,500,000.00 87.50% $      875,000.00 Less:Fixed Operating Cost $    1,250,000.00 31.25% $                       -   EBIT $    2,250,000.00 56.25% $      875,000.00 Less: Interest $        350,000.00 $                       -   EBT $    1,900,000.00 $      875,000.00 Tax @30% $        570,000.00 $      262,500.00 EAT $    1,330,000.00 $      612,500.00 Percentageof EBIT increase (875,000/2,250,000) 38.89% Percentageof EAT increase (367,000/1,330,000) 46.05% Answer: D.

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