Calculate the firm’s earnings before interest and taxes (EBIT) for sales of 10,000 units.

Stewart Industries sells its finished product for $9 per unit. Its fixed operating costs are $20,000, and the variable operating cost per unit is $5.

 

a. Calculate the firm’s earnings before interest and taxes (EBIT) for sales of 10,000 units.

b. Calculate the firm’s EBIT for sales of 8,000 and 12,000 units, respectively.

c. Calculate the percentage changes in sales (from the 10,000-unit base level) and

associated percentage changes in EBIT for the shifts in sales indicated in part b.

d. On the basis of your findings in part c, comment on the sensitivity of changes in

EBIT in response to changes in sales.

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