CH4 Mini Case (1 of 4)

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CHAPTER 4 MINI CASE: JEN AND LARRYS FROZEN YOGURT COMPANYIn 2008, Jennifer (Jen) Liu and Larry Mestas founded Jen and Larrys Frozen Yogurt Company, which was based on the idea of applying the microbrew or microbatch strategy to the production and sale of frozen yogurt. [You may recall that this yogurt venture was introduced in the problems section at the end of Chapter 2.] Jen and Larry began producing small quantities of unique flavors and blends in limited editions. Revenues were $600,000 in 2010 and were estimated at $1.2 million in 2011. Since Jen and Larry were selling premium frozen yogurt containing high-quality ingredients, each small cup of yogurt sold for $3 and the cost of producing the frozen yogurt averaged $1.50 per cup. Administrative expenses, including Jens and Larrys salaries and expenses for an accountant and two other administrative staff, were estimated at $180,000 in year 2011. Marketing expenses, largely in the form of behind-the-counter workers, in-store posters, and advertising in local newspapers, were projected to be $200,000 in year 2011. An investment in bricks and mortar was necessary to make and sell the yogurt. Initial specialty equipment and the renovation of an old warehouse building in Lower Downtown (known as LoDo) occurred at the beginning of 2010 and additional equipment needed to make the amount of yogurt forecasted to be sold in year 2011 was purchased at the beginning of 2011. As a result, depreciation expenses were expected to be $50,000 in year 2011. Interest expenses were estimated at $15,000 in 2011. The average tax rate was expected to be 25 percent of taxable income.Note: For analysis and reference purposes, you should keep in mind the following definitions:EBITDA (page 135) is a firms earning before interest, taxes, depreciation, and amortization.EBDAT (page 135) is a firms earnings before depreciation, amortization, and taxes (and includes interest).

EBDAT = Revenues - Variable Costs - Cash Fixed Costs (CFC)EBIT is the firms earnings before interest and taxes.EBDAT Breakeven (page 135) is the amount of revenues (i.e., survival revenues) needed to cover a ventures cash operating expenses. Breakeven means that revenues minus variable costs minus fixed costs equal zero.

Survival Revenue (SR) (page 136) is the amount of revenues needed to cover the venture's variable and fixed costs to breakeven (i.e., EBDAT Breakeven).

SR = [CFC/(1-VCRR)]

Cash Fixed Costs (CFC) (include both fixed operating costs (i.e., administrative and marketing) and fixed financing (i.e., interest) costs.

Variable Cost Revenue Ratio (VCRR) is the ratio of variable costs to revenues; i.e., cost of goods sold as a percent of revenues/sales.

CH4 Case Problems (2 of 4)A. 1.2 million = 3 times x(number of cups sold--->400000 cups soldThese Calculations show just how big of a difference there is between a bad year and an optimistic year. If they reach the forecasted sales they will make good sales and if the sales are the same as the previous years they will lose a substatial amount of money.B. EBDAT= Revenue-Cash Fixed Cost-Variable Costs Forcasted 1200000-180000-200000-15000-600000=205000Worst Case 600000-180000-200000-15000-300000=-95000Optimistic Case 1500000-180000-225000-15000-675000=405000C. EBDAT/SalesForecasted 205000/1200000=17% Worst Case -95000/600000=-16%Optimistic Case 405000/1500000=27%D. CFC/1-.5 (180000+200000+15000)/(1-.5) =790000G. 790000/3 = 263333 Cups

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CHAPTER 4 MINI CASE: JEN AND LARRYS FROZEN YOGURT COMPANY

You should refer to the comparative income statement for Jen and Larry's Frozen Yogurt Company in the following worksheet (i.e., in the tab "CH4 Answers").

Additional Case Information:

Jen and Larry projected revenues of $1.2 million for 2011. In addition, they believe that under a worst-case scenario for 2011, yogurt revenues would be at the 2010 level of $600,000 even after plans and expenditures were put in place to ramp up revenues.

On the other hand, Jen and Larry also believe that under very optimistic conditions, yogurt revenues could reach $1.5 million in year 2011. In this case, they anticipate finding ways to reduce production costs and plan to increase marketing expenses.

Problems:

Note: You should also insert your answers to these questions in the yellow highlighted cells below the income statement. You should use the highlighted Excel cell to insert a formula so that your calculations can be verified.

A. How many cups of frozen yogurt would have to be sold in order for the firm to reach its projected revenues for 2011, the worst case scenario and the optimistic scenario? B. Calculate the dollar amount of EBDAT if Jen and Larrys Micro-Batch Frozen Yogurt Company achieves the forecasted $1.2 million in sales for year 2011. Also calculate the dollar amount EBDAT for the worst case scenario and the optimistic scenario.

C. What would EBDAT be as a percent of revenues (sales) in 2011, in the worst case scenario, and in the optimistic scenario?D. Calculate the EBDAT breakeven point in terms of survival revenues for Jen and Larrys Frozen Yogurt Company.

G. How many cups of frozen yogurt would have to be sold to reach EBDAT breakeven.Analysis:

Using the last worksheet (i.e., CH4 Analysis), please comment on the significance of these calculations and compare the 2011 operations with the worst case and optimistic case for Jen and Larry's venture.

CH4 Answers (3 of 4) Jen and Larry's Frozen Yogurt CompanyComparative Income Statement2011% RevWorst Case Scenario% RevOptimistic Scenario% RevSales$1,200,000100.0%$600,000100.0%$1,500,000100.0%Cost of Goods Sold (50%)600,00050.0%300,00050.0%675,00045.0%Gross Profit$600,00050.0%$300,00050.0%$825,00055.0%

Administrative Expenses180,00015.0%180,00030.0%180,00012.0%Marketing Expenses200,00016.7%200,00033.3%225,00015.0%EBITDA$220,00018.3%$(80,000)-13.3%$420,00028.0%

Depreciation50,0004.2%50,0008.3%50,0003.3%EBIT$170,00014.2%$(130,000)-21.7%$370,00024.7%

Interest Expenses15,0001.3%15,0002.5%15,0001.0%Earnings Before Taxes$155,00012.9%$(145,000)-24.2%$355,00023.7%

Taxes (25% of EBT)38,7503.2%(36,250)-6.0%88,7505.9%

Net Income$116,2509.7%$(108,750)-18.1%$266,25017.8%

Please insert your answers in the cells highlighted in yellow.ExemplarASales in units (i.e., cups)400,000200,000500,000

BEBDAT$205,000$(95,000)$405,000

CEBDAT/Sales17.08%-16.00%27.00%

FEBDAT Breakeven Sales-a)$790,000$790,000$840,000

GEBDAT Breakeven Units-b)263,333263,333280,000

(a-EBDAT Breakeven sales equals survival sales (SR).(b-EBDAT Breakeven units equals the breakeven sales (SR) divided by the price per unit.

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CH4 Analysis (4 of 4)

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CHAPTER 4 MINI CASE: JEN AND LARRYS FROZEN YOGURT COMPANY

Analysis:

Here are some key points from the chapter where we used accounting information to address venture survival and breakeven levels of revenue and unit sales. You may also refer to the formulas and definitions in the working papers for Chapter 4 problems.

1. The EBDAT breakeven analysis determined the level of survival revenues (SR) that would be necessary to cover the venture's variable and cash fixed costs (CFC).

SR = [CFC/91-VCRR)]

2. The relationship of variable costs to revenue ratio (VCRR) and the amount of cash fixed costs related to the amount of revenues affected the venture's survival.

Narrative:

Please use the space below to comment on the significance of the calculations on the previous worksheet and compare the 2009 operations with the worst case and optimistic case for Jen and Larry's venture.

Answer: The EBDAT breakeven is a very important bit of knowledge its almost like a minimum goal that the company must reach. If the company doesn't at least make that much in revenue then the company will be loosing money. The relationship between the variable costs and revenue is also and interesting one as the revenue rises the variable costs becomes a larger percentage of the costs because the fixed costs don't change they will account for a smaller percentage. Based on my observations of the worst case for Jen and Larry's venture they firm lost money in the previous year but with the projected sales that deficit will be made up for. If the optimistic mark is reached then the firm will be doing very well. If the worst case situation happens then there would need to be some major changes internally or else the company will not last much longer.