Barbarita’s Linens want to expand into the store next door to set up a Baby Supp

Question

Barbarita’s Linens want to expand into the store next door to set up a Baby Supply Store. She needs $150,000 for the build out and new inventory of the project.

Barbarita has a $250,000 line of credit from Hialeah National bank that is fully available at an interest rate of 6 percent.   $1,000,000 in equity with a cost of 3 percent. The Barbarita’s Linens just cancelled the $600,000 in preferred stock to Tia Olga, which paid an annual dividend of 10%. The companies’ tax rate is 30%.

How much will the expansion of Barbarita’s Baby Supply Store need to sell in dollars and units to break- even. The 3 items that the store will sell each are $15 and generate a $5 profit. Continue with information from above.

How many units are need to break even?

How many dollars will the store need to sell to break-even?

Explanation / Answer

Ans: Barbarita needs to set up a Baby Store for which the capital cost, opportunity costs, interest cost needs to be factored in to arrive at the total cost of setting up the store and buy in the inventory.

Capital Cost for build up = 150000$

Interest Cost = 15000$ (25000 x 6%)

Tax benefits = -4500$ (15000 x 30%)

Cost of Equity = 30000$

Opportunity cost = 60000$

Tax applicable = -18000$

Total = 232500$

Soln for 1st question = Units needed to break even are 232500 / 5$ (profit%) = 46500 units to be sold

Soln for 2nd question = Dollars needed to sell at break even are = 46500 x 15$(selling price) = 697500$.

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