Answer:
(a) Under plan 1:
EPS = EBIT ÷ Outstanding shares
= $600,000 ÷ 205,000
= 2.93
Under plan 2:
EPS = EBIT ÷ Outstanding shares
= ($600,000 - $248,000) ÷ 155,000
= 2.27
(b) Under plan 1:
EPS = EBIT ÷ Outstanding shares
= $850,000 ÷ 205,000
= 2.93
Under plan 2:
EPS = EBIT ÷ Outstanding shares
= ($850,000 - $248,000) ÷ 155,000
= 3.88
(c) Break-even EBIT is the amount of EBIT in which EPS of plan 1 is equal to the plan 2.
Let x be the break-even EBIT,
[tex]\frac{x}{205,000}=\frac{x-3,100,000\times0.08}{155,000}[/tex]
[tex]\frac{155}{205}x=x-248,000[/tex]
[tex]248,000=x[1-\frac{155}{205}][/tex]
x = $1,016,800