Question

Miller Mfg. is analyzing a proposed project. The company expects to sell 12,000 units, give or take 3 percent. The expected variable cost per unit is $8.00 and the expected fixed cost is $34,000. The fixed and variable cost estimates are considered accurate within a plus or minus 5 percent range. The depreciation expense is $29,000. The tax rate is 34 percent. The sale price is estimated at $12.00 a unit, give or take 4 percent.
What is the earnings before interest and taxes under the base case scenario?

$-15,000

$14,000

$-10,000

$-983

$19,000

Answer 1

Solution:-

Number of units under the best case scenario = 12000*103% = 12360

Sale price per unit under the best case scenario = 12*104%= $12.48

Variable cost under the best case scenario = 8*95%= $7.60

Contribution under the best case scenario = (12.48-7.60)*12360= 60,316.80

Fixed cost under the best case scenario = 34000*95%= $32,300

Depreciation expense = $29000

Earning before interest and taxes under the best case scenario = (60,316.80-32,300 - 29,000)= $-983.20

Option D is correct i.e. $-983