During its first year of operations, the SubRay Corporation produced the following income statement results. 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.

1) Estimate the survival or earnings before D&A and Tax (EBDAT) breakeven amount in terms of survival revenues necessary for the SubRay Corporation to breakeven next year.

2) Assume the company will achieve the estimated Survival revenue, calculate cogs, CFC, and EBDAT.

 

Income Statement
Net Sales (Revenue)	300
less: Cost of Goods Sold	180
Gross Profit	120
less: General & Administration	60
less: Marketing Expenses	60
less: Depreciation	20
EBIT	-20
less: Interest Expense	10
Earnings before taxes	-30
less: Income taxes	0
Net earnngs (loss)	-30

 

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

• VC = Variable cost = ??
• R = Revenue = ??
• VCRR = variable cost revenue ration = VC / R = ??
• CFC = Fixed cost = general admin cost + marketing cost + interest = ??
• Survival revenue = CFC / (1 – VCRR) = ??

Answer rating: 100% (QA)

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