Use the following data to construct an income statement for Cheryl’s posters:
Sales price $20 per unit
Variable Cost $10 per unit
Fixed costs $5,000
Sales in Units 1,000
Required:
Calculate the Earnings before Interest and Taxes (EBIT) for Cheryl’s Posters using the data provided above.
Prepare two pro forma income statements assuming:
a 50% increase in sales (1,500)
a 50% decrease in sales (500)
What is the impact on earnings before interest and taxes (EBIT) of the 50% increase/decrease in sales?
Explain using the concept of leverage.