Reference no: EM13575599

In 2010, Jennifer (Jen) Liu and Larry Mestas founded Jen and Larry's Frozen Yogurt Company, which was based on the idea of applying the microbrew or microbatch strategy to the production and sale of frozen yogurt. (The reader may recall that we introduced this yogurt venture in the problems section at the end of Chapter 2.) Jen and Larry began producing small quantities of unique flavors and blends in limited editions. Revenues were $600,000 in 2010 and were estimated to be $1.2 million in 2011. Because Jen and Larry were selling premium frozen yogurt containing premium ingredients, each small cup of yogurt sold for $3, and the cost of producing the frozen yogurt averaged $1.50 per cup. Administrative expenses, including Jen and Larry's salary and expenses for an accountant and two other administrative staff, were estimated at $180,000 in 2011. Marketing expenses, largely in the form of behind-the-counter workers, in-store posters, and advertising in local newspapers, were projected to be $200,000 in 2011. An investment in bricks and mortar was necessary to make and sell the yogurt. Initial specialty equipment and the renovation of an old warehouse building in lower downtown (known as LoDo) occurred at the beginning of 2010. Additional equipment needed to make the amount of yogurt forecasted to be sold in 2011 was purchased at the beginning of 2011. As a result, depreciation expenses were expected to be $50,000 in 2011. Interest expenses were estimated at $15,000 in 2011. The average tax rate was expected to be 25 percent of taxable income.

A. How many cups of frozen yogurt would have to be sold for the firm to reach its projected revenues of $1.2 million?

B. Calculate the dollar amount of EBDAT if Jen and Larry's Frozen Yogurt Company achieves the forecasted $1.2 million in sales for 2011. What would EBDAT be as a percent of revenues?

C. Jen and Larry believe that under a worst-case scenario, yogurt revenues would be at the 2010 level of $600,000 even after plans and expenditures were put in place to increase revenues in 2011. What would happen to the venture's EBDAT?

D. Jen and Larry also believe that, under optimistic conditions, yogurt revenues could reach $1.5 million in 2011. Show what would happen to the venture's EBDAT if this were to happen.

E. Calculate the EBDAT breakeven point for 2011 in terms of survival revenues for Jen and Larry's Frozen Yogurt Company. How many cups of frozen yogurt would have to be sold to reach EBDAT breakeven?

F. Show what would happen to the EBDAT breakeven in terms of survival revenues if the cost of producing a cup of yogurt increased to $1.60 but the selling price remained at $3.00 per cup. How would the EBDAT breakeven change if production costs declined to $1.40 per cup when the yogurt selling price remained at $3.00 per cup?

G. Show what would happen to the EBDAT breakeven point in terms of survival sales if an additional $30,000 was spent on advertising in 2011 while the other fixed costs remained the same, production costs remained at $1.50 per cup, and the selling price remained at $3.00 per cup.

H. Now assume that, due to competition, Jen and Larry must sell their frozen yogurt for $2.80 per cup in 2011. The cost of producing the yogurt is expected to remain at $1.50 per cup and cash fixed costs are forecasted to be $395,000 ($180,000 in administrative, $200,000 in marketing, and $15,000 in interest expenses). Depreciation expenses and the tax rate are also expected to remain the same as projected in the initial discussion of Jen and Larry's venture. Calculate the EBDAT breakeven point in terms of survival breakeven revenues.