Sales 20 million Cost of goods sold 70 of sales General adm

Sales

$20 million

Cost of goods sold

70% of sales

General & administrative expenses

$300,000

Selling expense

$100,000 plus 10% of sales

Debt outstanding

$5 million at 8% interest rate

Effective tax rate

35%

Common shares outstanding

2 million

An analyst has developed an estimate of the earnings per share for her firm for the next year using the following parameters. Sales $20 million Cost of goods sold 70% of sales General & administrative expenses $300,000 Selling expense $100,000 plus 10% of sales Debt outstanding $5 million at 8% interest rate Effective tax rate 35% Common shares outstanding 2 million She is now interested in the sensitivity of earnings per share to sales forecast changes. A 10% sales increase would increase earnings per share by
A.	7.0 cents per share.
B.	10.4 cents per share.
C.	13.0 cents per share.
D.	20.0 cents per share.

Solution

Current With Increases Sales Sales revenue 20,000,000 22,000,000 Less: Cost of Goods sold@70% 14,000,000 15400000 Gross Margin 6,000,000 6,600,000 Less: Operating expensne Gen and admin expense 300,000 300,000 Selling fixed 100,000 100000 Selling variable 2000000 2200000 Interest 400000 400,000 ($ 5000,000*8%) Net income before tax 3,200,000 3,600,000 Common Share Outstanding 2,000,000 2,000,000 EPS 1.6 1.8 Answer is D. 20.0 cents per share