Problem $5-26($Static$)$ Operating leverage and ratios $[$LO$5-6]$

Ms$.$ Gold is in the widget business. She currently sells $1\mathrm{.}5$ million widgets a year at $$6$ each. Her variable cost to produce the widgets is $$4$ per unit, and she has $$1,550,000$ in fixed costs. Her sales$-$to$-$assets ratio is six times, and $30$ percent of her assets are financed with $10$ percent debt, with the balance financed by common stock at $$10$ par value per share. The tax rate is $35$ percent.

Her sister$-$in$-$law, Ms$.$ Silverman, says Ms$.$ Gold is doing it all wrong. By reducing her price to $$5\mathrm{.}00$ a widget, she could increase her volume of units sold by $60$ percent. Fixed costs would remain constant, and variable costs would remain $$4$ per unit. Her sales$-$to$-$assets ratio would be $7\mathrm{.}5$ times. Furthermore, she could increase her debt$-$to$-$assets ratio to $50$ percent, with the balance in common stock. It is assumed that the interest rate would go up by $1$ percent and the price of stock would remain constant.

Compute earnings per share under the Gold plan.

Note: Round your answer to $2$ decimal places.

Compute earnings per share under the Silverman plan.

Note: Round your answer to $2$ decimal places.

Ms$.$ Gold's chief financial officer does not think that fixed costs would would remain constant under the Silverman plan but that they would go up by $15$ percent. If this is the case, should Ms$.$ Gold shift to the Silverman plan, based on earnings per share?

multiple choice

Yes

No