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. Jen and Larry believe that under a worst-case scenario, yogurt revenues would be at the 2019 level of $600,00 even after plans and expenditures were put in place to increase revenues in 2020. What would happen to the venture’s EBDAT?
2. Jen and Larry also believe that, under optimistic conditions, yogurt revenues could reach $1.5 million in 2020. Show what would happen to the venture’s EBDAT if this were to happen.

Answer 1

A. Larry believe that under a worst-case scenario, yogurt revenues would be at the 2019 level of $600,000 even after plans and expenditures were put in place to increase revenues in 2020. What would happen to the venture's EBDAT?
Worst case scenario revenue =	$    600,000.00
# of cups to breakeven = $600,000/$3 =	$    200,000.00
EBTDA = Revenues (R) - Variable Costs (VC) – Cash Fixed Costs (CFC)
EBDAT = 600,000 - (1.50x200,000) - 180,000 - 200,000 - 15,000	(95,000.00)
B. Jen and Larry also believe that, under optimistic conditions, yogurt revenues could reach $1.5 million in 2020.what would happen to the venture's EBDAT if this were to happen
Optimisitic scenario revenue	$ 1,500,000.00
# of cups to breakeven = $1,500,000/$3 =	$    500,000.00
EBTDA = Revenues (R) - Variable Costs (VC) – Cash Fixed Costs (CFC)
EBDAT = 1,500,000 - (1.50x500,000) - 180,000 - 200,000 - 15,000	355,000.00