Question

Jen and Larry’s Frozen Yogurt Company

     In 2019, Jennifer (Jen) Liu and Larry Mestas founded Jean and Larry’s Frozen Yogurt Company, which was based on the idea of applying the microbrew or microbatch strategy to the production and sale of frozen yogurt. Jen and Larry began producing small quantities of unique flavors and blends in limited editions. Revenues were $600,000 in 2019 and were estimated to be $1.2 million in 2020.

     Because Jen and Larry were selling premium frozen yogurt containing premium ingredients, each small cup of yogurt sold for $3, and the cost of producing the frozen yogurt averaged $1.50 per cup. Administrative expenses, including Jen and Larry’s salary and expenses for an accountant and two other administrative staff, were estimated at $180,000 in 2020. Marketing expenses, largely in the form of behind-the-counter workers, in-store posters, and advertising in local newspapers, were projected to be $200,000 in 2020.

     An investment in bricks and mortar was necessary to make and sell the yogurt. Initial specialty equipment and the renovation of an old warehouse building in lower downtown (known as LoDo) occurred at the beginning of 2019. Additional equipment needed to make the amount of yogurt forecasted to be sold in 2020 was purchased at the beginning of 2020. As a result, depreciation expenses were expected to be $50,000 in 2020. Interest expenses were estimated at $15,000 in 2020. The average tax rate was expected to be 25% of taxable income.

1. Calculate the EBDAT breakeven point for 2020 in terms of survival revenues for Jen and Larry’s Frozen Yogurt Company. How many cups of frozen yogurt would have to be sold to reach EBDAT breakeven?

2. Show what would happen to the EBDAT breakeven point in terms of survival revenues if the cost of producing a cup of yogurt increased to $1.60 but the selling price remained at $3.00 per cup. How would the EBDAT breakeven change if production costs declined to $1.40 per cup when the yogurt selling price remained at $3.00 per cup?

Answer 1

A.Calculate the EBDAT breakeven point for 2020 in terms of survival revenues for Jen and Lary's Frozen Yogurt Company. How many cups of frozen yogurt would have to be sold to reach EBDAT breakeven?
Variable Cost Revenue Ratio (VCRR) = variable costs (VC)/revenues (R)
VCRR = (1.50 x 400,000)/1,200,000	0.50
Survival Revenues (SR) = [CFC/(1 – VCRR)]
CFC = 180,000 + 200,000  + 15,000 /(1 - .50)	$    790,000.00
# of cups to breakeven $790,000/$3	263,333.33	Cups
B. Show what would happen to the EBDAT breakeven in terms of survival revenues if the cost of producing a cup of yo- gurt increased to $1.60 but the selling price remained at $3.00 per cup. How would the EBDAT breakeven change if
Production cost	$1.60
VCRR = (1.60 x 400,000)/1,200,000	0.53
Survival Revenues (SR) = [CFC/(1 – VCRR)]
CFC = 180,000 + 200,000  + 15,000 /(1 - .53)	$    846,428.57
# of cups to breakeven $846,428.57/$3	282,142.86	Cups
Production cost	$1.40
VCRR = (1.40 x 400,000)/1,200,000	0.47
Survival Revenues (SR) = [CFC/(1 – VCRR)]
CFC = 180,000 + 200,000  + 15,000 /(1 - .47)	$    740,625.00
# of cups to breakeven = $740,625/$3	246,875.00	Cup