Last year, Cayman Corporation had sales of $7,000,000, total variable costs of $3,000,000, and total fixed costs of $1,500,000. In addition, they paid $480,000 in interest to bondholders. Cayman has a 35% marginal tax rate. If Cayman's sales increase 7%, what should be the increase in earnings per share?

a. 8.7%

b. 13.9%

c. 11.2%

d. 10.8%

e. 13.3%

b. 13.9%

Explanation:

sales 7,000,000

variable cost (3,000,000)

contribution 4,000,000

fixed cost (1,500,000)

interest (480,000)

EBT 2,020,000

tax expense (707,000)

net income 1,313,000

contribution margin 4,000,000 / 7,000,000 = 4/7

if sales increase by 7%:

7,000,000 x 0.07 x 4/7 x (1 - 0.35) = 182,000

income after increase in sales: 1,313,000 + 182,000 = 1,495,000

increase in earnings: 1,495,000 / 1,313,000 - 1 = 0.138613861 = 13.9%