Use the following data to construct an income statement for Cheryl’s posters:

Sales price                              $20 per unit

Variable Cost                          $10 per unit

Fixed costs                              $5,000

Sales in Units                          1,000

Required:

Calculate the Earnings before Interest and Taxes (EBIT) for Cheryl’s Posters using the data provided above.

Prepare two pro forma income statements assuming:

a 50% increase in sales (1,500)

a 50% decrease in sales (500)

What is the impact on earnings before interest and taxes (EBIT) of the 50% increase/decrease in sales?

Explain using the concept of leverage.