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%

if you use only 25 for your entertainment and only 200 for the groceries that you really need and take out the 50 per month for the computer then that should be enough