Question

Sinclair Manufacturing and Boswell Brothers Inc. are both involved in the production of brick for the homebuilding industry. Their financial information is as follows:

Capital Structure
	Sinclair	Boswell
Deb @11%	\(900,000	0
Common stock, \)10 per share	600,000	\(1,500,000
Total	\)1,500,000	\(1,500,000
Common shares	60,000	150,000
Operating plans
Sales (55,000 units at \)20 each)	\(1,100,000	\)1,100,000
Less: variable cost	880,000 (\(16 per unit)	550,000 (\)10 per unit)
Fixed cost	0	305,000
Earnings before interest and taxes (EBIT)	\(220,000	\)245,000

d. In part b, if sales double, by what percentage will EPS increase?

Short answer

When the sales double in part b, then the EPS of the company also doubled. It increases by 100%.

Step-by-step solution

Number of shares

$\begin{array}{rcl}\mathrm{Number}\mathrm{of}\mathrm{shares}& =& \frac{\mathrm{Share}\mathrm{capital}}{\mathrm{Price}\mathrm{per}\mathrm{share}}\\ & =& \frac{\$1,500,000}{10}\\ & =& 150,000\end{array}$

Earning per share

Particulars	Amount after sales double	Amount before sales double
Sales (55,000 x $20) x2	$2,200,000	$1,100,000
Less: Variable cost (55,000 x $16) x 2	1,760,000	880,000
Operating income	$440,000	$220,000
Less: Fixed cost	0	0
Less: Interest cost of Boswell	0	0
Earning before tax (EBT)	$440,000	$220,000
Less: taxes	0	0
Earning after tax	$440,000	$220,000
No. of shares	150,000	150,000
EPS	2.93	1.46

% increase in EPS

$\begin{array}{rcl}\%\mathrm{increase}\mathrm{in}\mathrm{EPS}& =& \frac{\mathrm{EPS}\mathrm{after}\mathrm{sales}\mathrm{double}-\mathrm{EPS}\mathrm{before}\mathrm{sales}\mathrm{double}}{\mathrm{EPS}\mathrm{before}\mathrm{sales}\mathrm{double}}\times 1\\ & =& \frac{\$2.93-\$1.46}{\$1.46}\times 100\\ & =& 100\%\end{array}$