Question Five:

$(18$ marks$)$

Meyerson's Bakery is considering the addition of a new line of pies to its product offerings.

However, the following scenarios could be faced by this Bakery for the new line:

First scenario: It is expected that each pie will sell for $$17$ and the variable costs per pie will be

$$11.$ Total fixed operating costs are expected to be $$25,000.$ Meyerson's faces a marginal tax rate

of $25\%,$ will have interest expense associated with this line of $$3,500,$ and expects to sell about

$4,500$ pies in the first year.

Second scenario: It is expected that each pie will sell for $$15$ and the variable costs per pie will be

$$9.$ Total fixed operating costs are expected to be $$20,000.$ Meyerson's faces a marginal tax rate of

$35\%,$ will have interest expense associated with this line of $$3,000,$ and expects to sell about $4,000$

pies in the first year.

Required:

a$.$ Create an income statement for the pie line's first year for both scenarios. Is the line expected to

be profitable under which scenarios?

b$.$ Calculate the operating break$-$even point in both units and dollars for each scenario.

c$.$ Under the first scenario, How many pies would Meyerson's need to sell in order to achieve EBIT

of $$20,000?($EBIT $=$ Earnings Before Interest and Taxes$).$

d$.$ Under the second scenario, How many pies would Meyerson's need to sell in order to achieve

EBIT of $$15,000?($EBIT $=$ Earnings Before Interest and Taxes$).$

e$.$ Use the Goal Seek tool to determine the selling price per pie that would allow Meyerson's to

break even in terms of its net income.