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Question 12.3: The Vinyl CD Co. is going to take on a project that is expec...

The Vinyl CD Co. is going to take on a project that is expected to increase its EBIT by $90,000, its fixed cost cash expenditures by $100,000, and its depreciation and amortization by $80,000 next year. If the project yields an additional 10 percent in revenue, what percentage increase in the project’s EBIT will result from the additional revenue?

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\begin{matrix} Accounting \ DOL&=&1+\frac{FC+D\&A}{EBIT} \\ \\ &=&1+\frac{\$100,000+\$80,000}{\$90.000}\\ \\&=&3\end{matrix}

Therefore, a 10 percent additional increase in revenue should result in approximately a 30 percent increase in EBIT.

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