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 expected case scenario?

Question

Quizplus · Accepted Answer

The expected case scenario is the most likely outcome, so we use the expected values for all variables. The earnings before interest and taxes (EBIT) is calculated as follows:EBIT = (Sales - Variable costs - Fixed costs - Depreciation) * (1 - Tax rate)EBIT = (12,000 units * $14 per unit - 12,000 units * $7 per unit - $36,000 - $30,000) * (1 - 0.34)EBIT = $18,000