Question

COST-VOLUME ANALYSIS

During its first year of operations, the S-Ray Corporation produced the following income statement results:

Income Statement	2013
Net Sales	400,000.00
less: Cost of Goods Sold	240,000.00
Gross Profit	160,000.00
less: General & Administrative	60,000.00
less: Marketing expenses	60,000.00
less: Depreciation	20,000.00
EBIT	20,000.00
less: Interest expenses	10,000.00
Earnings before taxes	10,000.00
less: Income taxes (30%)	3,000.00
Net earnings (loss)	7,000.00

Costs of goods sold are expected to vary with sales and be a constant percentage of sales. The general and administrative employees have been hired and are expected to remain a fixed cost. Marketing expenses are also expected to remain fixed since the current sales staff members are expected to remain on fixed salaries and no new hires are planned. The effective tax rate is expected to be 30 percent for a profitable firm.

Estimate the survival or EBDAT breakeven amount in terms of survival revenues necessary for the S-Ray Corporation to breakeven next year, or the Survival revenues (SR) to achieve EBDAT = 0.

Use the attached spreadsheet for analysis,

1	From question		per unit
2
3		computer chips	70					<-- from question
4		plastic casings	15					<-- from question
5		assembly hardware	5					<-- from question
6		direct labor	5					<-- from question
7		total cost	95					<-- from question
8		price	142.5					<-- from question
9
10	Sales
11				Jan	Feb	Mar	1st Qtr
12
13	units of sales			200	400	800	1400	<-- from question
14	dollar sales			??	??	??	??	<-- from question
15
16	Cost of production schedule
17
18			per unit	Jan	Feb	Mar	1st Qtr
19	Production			500	500	500	1500	<-- from question
20	Production Cost
21		computer chips	70	??	??	??	??	<-- prodution * unit cost
22		plastic casings	15	??	??	??	??	<-- prodution * unit cost
23		assembly hardware	5	??	??	??	??	<-- prodution * unit cost
24		direct labor	5	??	??	??	??	<-- prodution * unit cost
25	Total production cost		95	??	??	??	??	<-- prodution * unit cost
26
27	Cost of goods sold schedule
28
29			per unit	Jan	Feb	Mar	1st Qtr
30	Units of sales			200	400	800	1400	<-- from question
31	Sales			??	??	??	??	<-- price * unit of sales
32	Cost of goods sold		95	??	??	??	??	<-- sales * unit cost
33	Gross profit			??	??	??	??	<-- sales - cost of goods sold
34
35	Inventories schedule
36				Jan	Feb	Mar
37	Beginning finished goods			??	??	??		<-- previous ending inventories
38	Production
39		Materials		??	??	??		<--  computer + plastic + assembly
40		Direct labor		??	??	??		<-- labor
41	Additions			??	??	??		<-- sum of materials and labor cost
42	Total (beg + additions)			??	??	??		<-- beginning + additions
43	Less: cost of goods sold			??	??	??		<-- cogs
44	Ending finished goods			??	??	??		<-- ending inventories
45
46
47
48
49				Jan	Feb	Mar	1st Qtr
50	Total production cost			??	??	??	??
51	Sales			??	??	??	??
52	Cost of goods sold			??	??	??	??
53	Beginning finshed goods			??	??	??
54	Ending finished goods			??	??	??

Item	Results	Formula
Revenue (R )	??	<-- Revenue
Variable Cost (VC)	??	<-- cost of goods sold
CFC	??	<-- Admin + Marketing + Interest
VCRR	??	<-- VC / R
Survival	??	<-- CFC / (1 - VCRR)

Answer 1

A)

Estimate the survival of EBDAT beakeven amount in terms of survival revenues necessary for the SubRay Corporation to Breakeven next year.

Survival revenues (SR), when EBDAT = 0, are calculated as:

VCRR =(VC/R)= $ 240,000/400000 = $ .60

CFC =general and administrative + marketing + interest expense = S60,000 + S60,000+$10,000 =$130,000

SR = [$130000/(1/0.6)]= $130000/0.40 = $325000

Check:

Survival revenues

$3,25,000.00

Cost of goods sold (60%)

$1,95,000.00

Gross Profit

$1,30,000.00

General and administrative

$    60,000.00

Marketing

$    60,000.00

Interest Expenses

$    10,000.00

EBDAT

$                  -

This solution is provided with detailed explanation. Please discuss in case of Doubt.

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