Chapter 4 Group Case 1.docx.docx
SolBridge International School of Business
FIN ENT418B
1. [Survival Revenues Breakeven] During its first year of operations, the SubRay Corporation produced the following income statement results: Net Sales $300,000 Cost of Goods Sold -180,000 Gross Profit 120,000 General & Administrative -60,000 Marketing expenses -60,000 Depreciation -20,000 E
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Chapter 4 Group Case 1.docx.docx
SolBridge International School of Business
-
FIN ENT418B
-
1. [Survival Revenues Breakeven] During its first year of operations, the SubRay Corporation produced the following income statement results: Net Sales $300,000 Cost of Goods Sold -180,000 Gross Profit 120,000 General & Administrative -60,000 Marketing expenses -60,000 Depreciation -20,000 EBIT -20,000 Interest expenses -10,000 Earnings before taxes -30,000 Income taxes -0 Net earnings (loss) $-30,000 Costs of goods sold are expected to vary with sales and be a constant percentage of sales. The general and administrative employees have been hired and are expected to remain a fixed cost. Marketing expenses are also expected to remain fixed since the current sales staff members are expected to remain on fixed salaries and no new hires are planned. The effective tax rate is expected to be 30 percent for a profitable firm. A. Estimate the survival or EBDAT breakeven amount in terms of survival revenues necessary for the SubRay Corporation to breakeven next year. Survival revenue ( SR), when EBDAT = 0 , are calculated as: VCRR= (VC/R) = $180,000/$300,000= .60 CFC = general and administrative +marketing + Interest expense = $ 60,000 + $60,000 +$ 10,000 = $ 130,000 SR= [$130,000/(1-.60)]=$ 130,000/40 = $325,000 B. Assume that the product selling price is $50 per unit. Calculate the EBDAT breakeven point in terms of the number of units that will have to be sold next year. Survival revenues (SR) for a zero EBDAT from Part A = $325,000 $325,000/$50 = 6,500 units
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