A corporation reports sales of $4,000,000,variable costs of $500,000,fixed operating costs of $1,250,000,and interest expense of $350,000.The corporation's EBIT is $3,250,000 and its marginal tax rate is 30%.If the corporation is able to increase its sales by 25%,then

Question

Quizplus · Accepted Answer

The formula to calculate the new EBIT is as follows:

New EBIT = Old EBIT + (25% x Old EBIT) = $3,250,000 + $812,500 = $4,062,500

The formula to calculate the new net income is as follows:

New Net Income = New EBIT x (1 - Tax Rate) - Interest Expense

New Net Income = $4,062,500 x (1 - 0.3) - $350,000 = $1,979,750

The percentage increase in net income is:

Percentage Increase in Net Income = (New Net Income - Old Net Income) / Old Net Income x 100

Percentage Increase in Net Income = ($1,979,750 - $1,722,500) / $1,722,500 x 100 = 14.95%

Therefore, the corporation's EBIT will increase by more than 25%, but since taxes and interest expense reduce the net income, the percentage increase in EPS will be less than the percentage increase in EBIT. Therefore, the correct answer is D.

A Corporation Reports Sales of $4,000,000,variable Costs of $500,000,fixed Operating