Kulwicki Corporation's Expected EBIT Calculation

Operating Leverage and Sales Expansion Analysis

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Question

Kulwicki Corporation wants to determine the effect of an expansion of its sales on its operating income (EBIT). The firm's current degree of operating leverage is

2.5. It projects new unit sales to be 170,000, an increase of 45,000 over last year's level of 125,000 units. Last year's EBIT was $60,000. Based on a degree of operating leverage of 2.5, what is this year's expected EBIT with the increase in sales?

Answers

Explanations

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Explanation

Set up the DOL equation, letting x be the unknown new EBIT:

Let x = New EBIT.

DOL(Q) = % change EBIT/ % change Sales

% change in sales = 45000/125000 = 36%

2.5 = (x - $60,000/$60,000) / .36

2.5 (0.36) = ((x - $60,000)/$60,000)

0.90 = (x - $60,000/$60,000)

$54,000 = x - $60,000

x = $114,000.

New EBIT = $114,000.

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