CMA Study Group

CVP Analysis - EBIT vs Operating Income

  • 1.  CVP Analysis - EBIT vs Operating Income

    Posted 24 days ago
    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
    nupur1188@...
    Hartford CT United States
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  • 2.  RE: CVP Analysis - EBIT vs Operating Income

    Posted 23 days ago
    But here they have clearly mentioned that '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.' So we use EBIT.
    Also according to my understanding, EBIT and operating income is the same.
    EBIT and net income is different. EBIT minus interest become earnings before tax and EBT minus tax will become net income.


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    Azzah Hassan
    None
    Dubai
    United Arab Emirates
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  • 3.  RE: CVP Analysis - EBIT vs Operating Income

    Posted 23 days ago
      |   view attached
    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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  • 4.  RE: CVP Analysis - EBIT vs Operating Income

    Posted 23 days ago
    EBIT is different than Operating Income by items catagorized as non-operating income/expense as mentioned by Mr. Aly above.  In this problem, there is no mention of non-operating items so assume EBIT=Operating Income.

    Working backwards from EBIT:
    EBIT is 32% of the investment or $80,000 (250,000 x 32%).
    Back out fixed costs from EBIT to get Contribution Margin of $202,500 (80,000 + 122,500)
    As CM% is 42%, Sales are $482,143 (202,500 / 42%).
    As unit sales are $15, Volume is 32,143 (482,143 / 15).

    Basically the same result as Mr. Aly but using a narrative format.  Hope this helps.

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    Matthew Thomas
    Director/Manager
    Seattle WA
    United States
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