Southern Goods is analyzing a proposed project using standard sensitivity analys

Question

Southern Goods is analyzing a proposed project using standard sensitivity analysis. The company expects to sell 4,500 units, ±11 percent. The expected variable cost per unit is $13 and the expected fixed costs are $12,000. Cost estimates are considered accurate within a ± 5 percent range. The depreciation expense is $5,000. The sale price is estimated at $22 a unit, ±2 percent. The company is conducting a sensitivity analysis on the sales price using a sales price estimate of $18. Using this value, the earnings before interest and taxes will be:

5,500 2,500 O 10,500 6,000

Explanation / Answer

Answer - 5500

It clearly mentioned in the questioned that it is using sales price $18 for sensitivity analysis. Therefore, using this value EBIT is calculated. Hence, getting the answer $5500

Sales (4500*18) $81000 Variable cost (4500*13) ($58500) Fixed Cost ($12000) Depreciation Expense ($5000) Earnings before interest and taxes $5500

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