4 leverage and capital structure the ebit for various

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Unformatted text preview: E 12.4 Leverage and Capital Structure The EBIT for Various Sales Levels Case 2 Case 1 50% 50% Sales (in units) 500 1,000 1,500 Sales revenuea $5,000 $10,000 $15,000 Less: Variable operating costsb 2,500 5,000 7,500 Less: Fixed operating costs 2,500 2,500 2,500 0 $ 2,500 $ 5,000 Earnings before interest and taxes (EBIT) $ 100% aSales revenue $10/unit bVariable operating costs EXAMPLE 513 100% sales in units. $5/unit sales in units. Using the data for Cheryl’s Posters (sale price, P $10 per unit; variable operating cost, VC $5 per unit; fixed operating cost, FC $2,500), Figure 12.2 presents the operating breakeven graph originally shown in Figure 12.1. The additional notations on the graph indicate that as the firm’s sales increase from 1,000 to 1,500 units (Q1 to Q2), its EBIT increases from $2,500 to $5,000 (EBIT1 to EBIT2). In other words, a 50% increase in sales (1,000 to 1,500 units) results in a 100% increase in EBIT ($2,500 to $5,000). Table 12.4 includes the data for Figure 12.2 as well as relevant...
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