Final answer:
To calculate EBIT for Stewart Industries, the selling price per unit, variable costs per unit, and fixed costs are used in a formula considering sales volumes. EBIT for 10,000, 8,000, and 12,000 units is determined by applying revenues and costs to this formula and comparing the percentage changes in EBIT with sales changes to assess sensitivity.
Step-by-step explanation:
Calculating EBIT and Assessing Sensitivity to Sales Volume
To calculate the earnings before interest and taxes (EBIT) for a company, you need to know the company's revenue, which is the sales volume multiplied by the selling price per unit, and the total costs, which include both fixed and variable costs. The formula for EBIT is Total Revenue - Total Costs (Fixed + Variable). For Stewart Industries, the calculation at 10,000 units of sales would be:
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- Total Revenue = Sales Volume × Selling Price
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- Total Costs = Fixed Operating Costs + (Variable Operating Cost × Sales Volume)
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- EBIT = Total Revenue - Total Costs
To answer part a, the EBIT for sales of 10,000 units would be:
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- Total Revenue = 10,000 units × $9.63/unit
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- Total Costs = $19,400 + (10,000 units × $5.53/unit)
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- EBIT = Total Revenue - Total Costs
For part b, the process is repeated for sales of 8,000 and 12,000 units. Lastly, for part c, the percentage change in sales and the associated percentage change in EBIT compared to the base level of 10,000 units would need to be calculated to determine sensitivity. This assesses how changes in sales volume can affect the firm's profitability.
In conclusion, part d would involve a discussion on the EBIT sensitivity to changes in sales. A high sensitivity would mean that small changes in sales volume could lead to significant changes in EBIT, indicating a higher business risk associated with sales fluctuations.