The Quick Producers Co. is analyzing a proposed project. The company expects to sell 10,000 units, give or take 5 percent. The expected variable cost per unit is $6 and the expected ﬁxed cost
Is $29,000. The ﬁxed and variable cost estimates are considered accurate within a plus or minus 4
Percent range. The depreciation expense is $25,000. The tax rate is 34 percent. The sale price is
Estimated at $13 a unit, give or take 6 percent.
What is the earnings before interest and taxes under the base case scenario?
A) $10,560
B) $16,000
C) $22,440
D) $41,000
E) $66,000

Question

Quizplus · Accepted Answer

First, let's calculate the expected revenue: 
10,000 units x $13/unit = $130,000

Since there is a 6% range on the sale price, the minimum and maximum revenue would be: 
Minimum revenue = $122,200 (10,000 x $12.35) 
Maximum revenue = $137,800 (10,000 x $13.70)

Next, let's calculate the expected variable cost: 
10,000 units x $6/unit = $60,000

Since there is a 5% range on the number of units sold and a 4% range on variable cost, the minimum and maximum variable cost would be: 
Minimum variable cost = $57,000 [(10,000 x 0.95) x ($6 x 0.96)] 
Maximum variable cost = $63,000 [(10,000 x 1.05) x ($6 x 1.04)]

Fixed cost is given as $29,000. Since there is a 4% range on fixed cost, the minimum and maximum fixed cost would be: 
Minimum fixed cost = $27,840 ($29,000 x 0.96) 
Maximum fixed cost = $30,160 ($29,000 x 1.04)

Depreciation expense is given as $25,000.

Now we can calculate the earnings before interest and taxes (EBIT) for the base case scenario:

Minimum EBIT = ($122,200 - $63,000 - $30,160 - $25,000) x (1 - 0.34) = $10,560 
Maximum EBIT = ($137,800 - $57,000 - $27,840 - $25,000) x (1 - 0.34) = $22,440

The best choice would be option B, which is the expected EBIT under the base case scenario, since it falls within the range of minimum and maximum EBIT.