1. Wilson’s Market is reviewing a project with sales of 6,200 units plus or minu
ID: 2778464 • Letter: 1
Question
1.
Wilson’s Market is reviewing a project with sales of 6,200 units plus or minus 2 percent at a sales price of $29 plus or minus 1 percent per unit. The expected variable cost per unit is $11 plus or minus 3 percent and the expected fixed costs are $87,000plus or minus 1 percent. The depreciation expense is $68,000 and the tax rate is 35 percent. What is the net income under the worst-case scenario?
E $4,696.18
2.
The CFO of Edward's Food Distributors is continually receiving capital funding requests from its division managers. These requests are seeking funding for positive net present value projects. The CFO continues to deny all funding requests due to the financial situation of the company. Apparently, the company is:
E) Operating at maximum capacity
3.
A project has the following estimated data: price = $52 per unit; variable costs = $27.56 per unit; fixed costs = $7,700; required return = 11 percent; initial investment = $10,000; life = three years. Ignore the effect of taxes.
What is the degree of operating leverage at the financial break-even level of output? (Do not round your intermediate calculations.)
Wilson’s Market is reviewing a project with sales of 6,200 units plus or minus 2 percent at a sales price of $29 plus or minus 1 percent per unit. The expected variable cost per unit is $11 plus or minus 3 percent and the expected fixed costs are $87,000plus or minus 1 percent. The depreciation expense is $68,000 and the tax rate is 35 percent. What is the net income under the worst-case scenario?
Explanation / Answer
1. B - $32,674.93
Notes: sales units = 6076(6200 - 2% of 6200) units , sale price per unit = 28.71(29 - 1% of 29)
Variable cost = 11.33 (11 + 3% of 11) , fixed cost = 87870 ( 87000 + 1% of 87000) , Depreciation Expenses = 68000.
Sales(6076 * 28.71) = 174441.96
less: Variable cost(6076 * 11.33) = 68841.08
Less: Fixed cost = 87870
Less: Depreciation = 68000
taxable income = - 50269.12
Less: tax @35% = - 17594.192
Net income -32674.928
2. B) Operating at the financial break-even point , because it is a situation, where EPS will be zero ,so there is no question of earning for investor to invest their funds in company without getting any return.
3. a accounting break-even quantity = Fixed cost / (price per unit - Variable cost)
= 7700 / (52 - 27.56)
= 315.057 unit
b cash break-even quantity = Fixed cost - non cash expenses / (price per unit - Variable cost)
= (7700 - 3333.33) / 52 - 27.56
= 4366.67 / 24.44
= 178.669 units
notes: Depreciation of 3333.33 ( 10000 / 3year) is a non cash expense which is included in fixed cost
c. financial break-even quantity =(Fixed cost + interest and preference dividend)/ (price - variable cost)
= 7700 + 1100( 11% of 10000) / 52 - 27.56
= 8800 / 24.44
= 360.065 units
d. degree of operating leverage at the financial break-even level of output = contribution / net income
= 8799.99 / 1099.99
= 8
Note : Income Statement at financial break even piont
sale (360.065 * 52) = 18723.38
less : Variable cost(360.065 * 27.56) = 9923.39
Less: Fixed cost = 7700
Net income 1099.99
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