Durosteel Shafts Inc. supplies cam shafts to GM for their popular Chevy Malibu model. Automobile sales fell significantly during the recent financial crisis. Now, at the end of Year 1, GDP is growing again and GM is forecasting an increase in automobile sales of 11% over the coming year. Use the data in the table to estimate Durosteel's operating profit margin (EBIT/Sales)for Year 2. $\begin{array}{|c|c|r|}
\hline \text {Durosteel}\
\text {Shafts Inc.}\
\text {$ (\$ 000,000 \mathrm{~s} $)}\
\hline & \begin{array}{l}
\text { Year 1 } \
\text { (Actual) }
\end{array} & \begin{array}{l}
\text { Year 2 } \
\text { (Forecast) }
\end{array} \
\hline \text { Sales } & \$ 920 & \$ 1,021 \
\hline \text { EBIT } & \$ 60 & \
\hline \begin{array}{c}
\text { Operating } \
\text { Profit Margin }
\end{array} & 6.52 \% & \
\hline \begin{array}{c}
\text { Operating } \
\text { Leverage }
\end{array} & 1.5 & \
\hline
\end{array}$

Question

Quizplus · Accepted Answer

The operating profit margin for Year 2 can be estimated by calculating the expected EBIT for Year 2 using the operating leverage and the forecasted sales increase. The formula is: New EBIT = Old EBIT + (Operating Leverage * % Change in Sales * Old EBIT). The % Change in Sales is 11%. New EBIT = 60 + (1.5 * 0.11 * 60) = 69.9. The forecasted sales for Year 2 is $1,021 million. Operating Profit Margin = New EBIT / Forecasted Sales = 69.9 / 1,021 = 6.84%.

Durosteel Shafts Inc A)1650% B)7

Durosteel Shafts Inc A)1650%
B)7