HiLo Mfg. is analyzing a project with anticipated sales of 12,500 units, ±2 percent. The variable cost per unit is $13, ± 2 percent, and the expected fixed costs are $237,000, ±1 percent. The sales price is estimated at $69 a unit, ±3 percent. The depreciation expense is $68,000 and the tax rate is 22 percent. What is the earnings before interest and taxes under the base-case scenario?
A) $368,500
B) $421,000
C) $395,000
D) $414,900
E) $427,500

Question

Quizplus · Accepted Answer

To calculate the earnings before interest and taxes (EBIT) under the base-case scenario, we need to use the following formula:

EBIT = (Sales price – Variable cost per unit) × Number of units – Fixed costs – Depreciation expense

We can use the given information and the ranges to calculate the minimum and maximum values for each variable:

- Number of units: 12,500 ± 2% = 12,250 to 12,750
- Variable cost per unit: $13 ± 2% = $12.74 to $13.26
- Fixed costs: $237,000 ± 1% = $234,630 to $239,370
- Sales price: $69 ± 3% = $66.93 to $71.07

Using the minimum values, we get:

EBIT = ($66.93 - $12.74) × 12,250 - $234,630 - $68,000 × (1 - 0.22)
EBIT = $395,111.50

Using the maximum values, we get:

EBIT = ($71.07 - $13.26) × 12,750 - $239,370 - $68,000 × (1 - 0.22)
EBIT = $414,689.50

Therefore, the earnings before interest and taxes under the base-case scenario is between $395,111.50 and $414,689.50, but the closest answer choice is C) $395,000.

HiLo Mfg Is Analyzing a Project with Anticipated Sales of 12,500