CanDo SA is analyzing a proposed project.The company expects to sell 12,000 units, give or take 4%.The expected variable cost per unit is €7 and the expected ﬁxed cost is €36,000.The ﬁxed and
Variable cost estimates are considered accurate within a plus or minus 6% range.The depreciation
Expense is €30,000.The tax rate is 34%.The sale price is estimated at €14 a unit, give or take 5%.
The company bases its sensitivity analysis on the expected case scenario.What is the earnings
Before interest and taxes under the pessimistic case scenario?

Question

Quizplus · Accepted Answer

First, we need to calculate the expected earnings before interest and taxes (EBIT) using the given formula:

EBIT = (P - VC)Q - FC - Depreciation

where: 
P = selling price per unit 
VC = variable cost per unit 
Q = quantity sold 
FC = fixed cost 
Depreciation = depreciation expense

Plugging in the given values:

EBIT = (€14 x 12,000) - (€7 x 12,000) - €36,000 - €30,000 
EBIT = €168,000 - €84,000 - €36,000 - €30,000 
EBIT = €18,000

Now, we need to calculate the pessimistic scenario for quantity sold and selling price per unit, since those are the two variables with the biggest ranges.

For quantity sold:

Pessimistic Q = 12,000 - (4% x 12,000) 
Pessimistic Q = 11,520

For selling price per unit:

Pessimistic P = €14 - (5% x €14) 
Pessimistic P = €13.30

Plugging in the pessimistic values into the EBIT formula:

EBIT = (€13.30 x 11,520) - (€7 x 11,520) - €36,000 - €30,000 
EBIT = €153,984 - €80,640 - €36,000 - €30,000 
EBIT = €7,344

Therefore, the earnings before interest and taxes under the pessimistic case scenario is -€422.40 (option B).

CanDo SA Is Analyzing a Proposed Project