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The Poseidon Swim Company produces swim trunks
The Poseidon Swim Company produces swim trunks. The average selling price for one of their swim trunks is $89.82. The variable cost per unit is $19.21, Poseidon Swim has average fixed costs per year of $6,091.
Assume that current level of sales is 304 units. What will be the resulting percentage change in EBIT if they expect units sold to changes by -5.0 percent? (You should calculate the degree of operating leverage first).
(Write the percentage sign in the "units" box).
Round the answer to two decimal places in percentage form.
Expert Solution
Computation of Percentage Change in EBIT:
Degree of Operating Leverage = Contribution Margin / EBIT
Here,
Contribution Margin = Sales - Variable Cost = 304 units*($89.82-$19.21) = $21,465.44
EBIT = Sales - Variable Cost - Fixed Cost = $21,465.44 - $6,091 = $15,374.44
Degree of Operating Leverage = $21,465.44/$15,374.44 = 1.40
Degree of Operating Leverage = % change in EBIT / % change in Sales
1.40 = % change in EBIT / -5.0%
% change in EBIT = 1.40 * -5.0% = -6.98%
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