Dears,
EBIT is not Operating income. usually Operating income more than EBIT. in some cases they can be equal. only if there is no any gain/losses from the non operations activities plus any interest or dividend income.
to solve this question
the required units = (fixed cost + additional income) / contribution margin per unit
= (122,500 + [32%(250,000)] / (42%*15)
= (122,500 + 80,000) / 6.3
=32,143 units.
Am I right ??
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Mohamed Aly
Chief Financial Officer
Jeddah
Saudi Arabia
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Original Message:
Sent: 03-17-2021 07:12 PM
From: Nupur Mahajan
Subject: CVP Analysis - EBIT vs Operating Income
Ok, so i have read a question and naturally my mind can differentiate between an EBIT and a Net Operating Profit/ Income.
Question: A manufacturer is considering introducing a new product that will require a $250,000 investment of capital. The necessary funds would be raised through a bank loan at an interest rate of 8%. The fixed operating costs associated with the product would be $122,500, while the contribution margin percentage would be 42%. Assuming a selling price of $15 per unit, determine the number of units (rounded to the nearest whole unit) the manufacturer would have to sell to generate earnings before interest and taxes (EBIT) of 32% of the amount of capital invested in the new product.
Analysis: So naturally, what i did is I subtracted the interest amount from EBIT to make it Operating income before tax to calculate the break even sales.
EBIT = 80,000 - 20000 = 60,000; However, Hock has directly added the EBIT to Fixed cost to get the break even sales.
So, my question here is - is EBIT and operating income same - Which i am pretty sure is not?
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Nupur Mahajan
<maskemail>nupur1188@...</maskemail>
Hartford CT United States
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