Maxvill Motors has annual sales of $15,000. Its variable costs equal 60 percent of its sales, and its fixed costs equal $1,000. If the company's sales increase 10 percent, what will be the percentage increase in the company's earnings before interest and taxes (EBIT)?
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First, find EBIT before sales increase:
EBIT = Sales - (Sales x VC%) - FC
= $15,000 - ($15,000 x 0.60) - $1,000
= $5,000.
Now, assuming sales increase by 10% or to $15,000 x 1.10 = $16,500, calculate the new EBIT. EBIT = $16,500 - ($16,500 x 0.60) - $1,000 = $5,600.
So, the percentage increase is [($5,600 - $5,000)/$5,000] x 100 = 12%.