EBIT Sensitivity Stewart Industries sells its finished product for $8.44 per uni

Question

EBIT Sensitivity Stewart Industries sells its finished product for $8.44 per unit Its fixed operating costs are $20,500, and the variable operating cost per unit is $5.73. a. Calculate the firm's earnings before interest and taxes (EBIT) for sales of 11,000 units. b. Calculate the firm's EBIT for sales of 10,000 and 12,000 units, respectively. c. Calculate the percentage changes in sales (from the 11,000-unit base level and associated percentage changes in EBIT for the shifts in sales indicated in part (b) d. On the basis of your findings in part (c), comment on the sensitivity of changes in EBIT in response to changes in sales. a. The firm's earnings before interest and taes is (Round to the nearest dollar) b. The EBIT for the 10,000 units level is $. (Round to the nearest dollar.) The EBIT for the 12,000 units level is $1-(Round to the nearest dollar) C. The change in sales as a percentage for the 10,000 units level is 96. (Round to one decimal place.) The change in sales as a percentage for the 12,000 units level is .96. (Round to one decimal place.) The change in EBIT as a percentage for the 10,000 units level is 1-196. (Round to one decimal place.) The change in EBIT as a percentage for the 12,000 units level is %. (Round to one decimal place.) d. On the basis of your findings in part (c), comment on the sensitivity of changes in EBIT in response to changes in sales. (Select the best answer below.) 0 A. EBIT is less sensitive to changing sales levels, it increases/decreases half as much as sales. B. Changes in sales have no effect on EBIT as long as the costs are the same. 0 C. EBIT is more sensitive to changing sales levels, it increases/decreases about twice as much as sales. 0 D. EBIT and sales are equally sensitive to changing sales levels, they increase/decrease the same as sales.

Explanation / Answer

a. EBIT = 11,000*(8.44-5.73) - 20,500 = 9310

b. EBIT = 10,000*(8.44-5.73) - 20,500 = 6600

EBIT = 12,000*(8.44-5.73) - 20,500 = 12020

d.

% change in sales = 10,000/11,000 - 1 = -9.09 %

% change ins ales = 12,000/11,000 - 1 = 9.09%

% change in EBIT = 6600/9310 -1 = -29.1%

% change in EBIT = 12020/9310 - 1 = 29.1%

option C

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