Question

The Can-Do Co. is analyzing a proposed project. The company expects to sell 12,000 units, give or take 4%. The expected variable cost per unit is $7 and the expected fixed cost is $36,000. The fixed and variable cost estimates are considered accurate within a plus or minus 6% range. The depreciation expense is $30,000. The tax rate is 34%.The sale price is estimated at $14 a unit, give or take 5%. The company bases its sensitivity analysis on the expected case scenario.

A.What is the earnings before interest and taxes under the pessimistic case scenario?

Answer 1

Under the Pessimistic case, all the estimates will be unfavourable to us, i.e., sales units and sale price will be lower and variable costs and fixed costs will be higher.

Sale price = $14 - 5% = $13.3

No. of units = 12000 - 4% = 11520

Variable cost per unit = $7 + 6% = $7.42

Fixed costs = $36000 + 6% = $38160

Sales (11520 x $13.3)	$153,216
Less: Variable cost (11520 x $7.42)	$85,478.40
Less: Fixed Costs	$38,160
Less: Depreciation	$30,000
Earnings before interest and taxes	(-)$422.40