The Hurricane Lamp Company forecasts that next year's sales will be $6 million.

Fixed operating costs are estimated to be $80

and the variable cost ratio (that is, variable costs as a fraction of sales) is estimated to be 0.75. The firm has a $600,000 loan at
percent interest. It has 20,000 shares of $3 preferred stock and 60,000 shares of common stock outstanding. Hurricane Lamp
the 40 percent corporate income tax bracket.
Forecast Hurricane Lamp's earnings per share (EPS) for next year. Develop a complete income statement using the revised for
illustrated in Table 14.1. Then determine what Hurricane Lamp's EPS would be if sales were 10 percent above the projected $6
million level.

(1)
Sales Revenue $6,000,000
Less:
Variable operating costs (75% of sales) $4,500,000 $4,950,000
Fixed operating costs $800,000 $800,000
Total operating costs $5,300,000
= EBIT $700,000
Less: Interest expenses $60,000
= Earnings before taxes $640,000
Less: Income taxes (40%) $256,000
= Earnings after taxes $384,000
Less: Preferred stock dividends ($3 @ 20,000 shares) $60,000
Earnings available to common shareholders $324,000
Earnings per share (60,000 shares) $5.40

At $6 million in sales, $700,000 in EBIT

DOL by definition 2.14 =F15/F10

DOL by computational formula 2.14 =(C10-B12)/C15

DFL by definition 1.30 =F22/F15

DFL by computation formula 1.30 =C15/(C15-C16-C20/(1-40%))

DCL by definition 2.78 =F22/F10 "DCL = "

DCL by computation formula 〖 "EPS" /"EPS" 〗∕
2.78 =(C10-B12)/(C15-C16-C20/(1-40%))
〖 "Sales" /"Sales"
Confirming DCL 2.78 =B26*B29 〗
rating costs are estimated to be $800,000,
.75. The firm has a $600,000 loan at 10
stock outstanding. Hurricane Lamp is in

ome statement using the revised format

e 10 percent above the projected $6

(2) % change
$6,600,000 10.00%

$5,750,000
$850,000 21.43%
$60,000
$790,000
$316,000
$474,000
$60,000
$414,000
$6.90 27.78%

"DOL= "
〖 "EBIT" /"EBIT" 〗 "DOL= " "Sales − Variable
∕〖 "Sales" /"Sales" costs" /"EBIT"
〗 = " 〖 "EPS"
"DFL
/"EPS" 〗∕〖 "EBIT "DFL = " "EBIT" /("EBIT − I −
" "D" _"p" "/(1−T)" )
" /"EBIT" 〗
"DCL = "
〖 "EPS" /"EPS" 〗∕
6-C20/(1-40%)) "DCL = " " Sales − Variable
〖 "Sales" /"Sales" costs" /("EBIT − I − " "D" _"p"
"/(1−T)" )
〗