Maxvill Motors has annual sales of $15,000. Its variable costs equal 60% of its

Question

Maxvill Motors has annual sales of $15,000. Its variable costs equal 60% of its sales and its fixed costs equal $1,000. If the company's sales increase 10%, what will be the percentage increase in the company's earnings before interest and taxes (EBIT)? Maxvill Motors has annual sales of $15,000. Its variable costs equal 60% of its sales and its fixed costs equal $1,000. If the company's sales increase 10%, what will be the percentage increase in the company's earnings before interest and taxes (EBIT)?

Explanation / Answer

Hi,

Please find the answer as follows:

Current EBIT:

Sales = 15000

Less Variable Costs = 15000*60% = 9000

Less Fixed Costs = 1000

EBIT = 15000 - 9000 - 1000 = 5000

Revised EBIT:

Sales = 15000*(1+.10) = 16500

Less Variable Costs = 15000*(1+.10)*60% = 9900

Less Fixed Costs = 1000

EBIT = 16500 - 9900 - 1000 = 5600

Percentage Increase in EBIT = (Revised EBIT - Current EBIT)/Current EBIT*100 = (5600 - 5000)/5000*100 = 12%

Answer is 12%.

Thanks.

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