The Can-Do Co. 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?
A) -$566.02
B) -$422.40
C) -$278.78
D) $3,554.50
E) $5,385.60

Question

Quizplus · Accepted Answer

To calculate the earnings before interest and taxes (EBIT) under the pessimistic case scenario, we need to calculate the lower range of sales, higher range of costs, and higher range of depreciation expense.

Lower range of sales = 12,000 * (1 - 4%) * (1 - 5%) = 11,232 units
Sale price = $14, so total revenue = 11,232 * $14 = $157,248

Higher range of variable cost per unit = $7 * (1 + 6%) = $7.42
Variable costs = 11,232 * $7.42 = $83,295.44

Higher range of fixed cost = $36,000 * (1 + 6%) = $38,160

Higher range of depreciation expense = $30,000 * (1 + 6%) = $31,800

EBIT = (Revenue - Variable costs - Fixed costs - Depreciation) * (1 - Tax rate)

EBIT = ($157,248 - $83,295.44 - $38,160 - $31,800) * (1 - 0.34) = -$422.40

Therefore, the answer is B.