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. Show what would happen to the EBDAT breakeven point in terms of survival sales if an additional $30,000 was spent on advertising in 2020 while the other fixed costs remained the same, production costs remained at $1.50 per cup, and the selling price remained at $3.00 per cup.

2. Now assume that, due to competition, Jen and Larry must sell their frozen yogurt for $2.80 per cup in 2020. The cost of producing the yogurt is expected to remain t $1.50 per cup and cash fixed costs are forecasted to be $395,000 ($180,000 in administrative, $200,000 in marketing, and $15,000 in interest expenses). Depreciation expenses and the tax rate are also expected to remain the same as projected in the initial discussion of Jen and Larry’s venture. Calculate the EBDAT breakeven point in terms of survival breakeven revenues.

Answer 1

A. Show what would happen to the EBDAT breakeven point in terms of survival sales if an additional $30,000 was spent on advertising in 2020 while the other fixed costs remained the same, production costs remained at $1.50 per cup. production costs declined to $1.40 per cup when the yogurt selling price remained at $3.00 per cup?
VCRR= (1.50 x 400,000)/1,200,000 =	0.50
Survival Revenues (SR) = [CFC/(1 – VCRR)]
CFC = 180,000 + 230,000  + 15,000 /(1 - .50)	$    850,000.00
# of cups to breakeven $850,000/$3	283,333.33	Cups

B. Now assume that, due to competition, Jen and Larry must sell their frazen yogurt for $2.80 per cup in 2017 The cost of producing the yogurt is expected to remain at $1.50 per cup and cash fixed costs are forecasted to be $395,000 ($180,000 in administrative, $200,000 in marketing, and $15,000 in interest expenses Depreciation expenses and the tax rate are also expected to remain the same as projected in the initial discussion of Jen and Larry's venture.

# of cups to breakeven = $1,200,000/ $2.80 =428571.43Cups

VCRR= (1.50 x 428,571)/1,200,000 =                  0.54

Survival Revenues (SR) = [CFC/(1 – VCRR)]

CFC = 180,000 + 200,000  + 15,000 /(1 - .54) = $850,769.23

# of cups to breakeven $850,769.23/$3 = 303,846.15Cups