In 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.
Page 1 of 4
Page 2 of 4
and in the
ys Frozen Yogurt
These Calculations show just how big of a difference there is between a bad year and an optimistic year. If they reach th
Page 2 of 4
Page 2 of 4
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 wi
Page 2 of 4
Page 2 of 4
nd if the sales are the same as the previous years they will lose a substatial amount of money.
Page 2 of 4
Sales
Cost of Goods Sold (50%)
Gross Profit
Administrative Expenses
Marketing Expenses
EBITDA
Depreciation
EBIT
Interest Expenses
Earnings Before Taxes
180,000
200,000
220,000
15.0%
16.7%
18.3% $
180,000
200,000
(80,000)
30.0%
33.3%
-13.3% $
180,000
225,000
420,000
12.0%
15.0%
28.0%
50,000
170,000
4.2%
14.2% $
50,000
(130,000)
8.3%
-21.7% $
50,000
370,000
3.3%
24.7%
15,000
155,000
1.3%
12.9% $
15,000
(145,000)
2.5%
-24.2% $
15,000
355,000
1.0%
23.7%
88,750
5.9%
266,250
17.8%
38,750
$
116,250
3.2%
(36,250)
9.7% $
C EBDAT/Sales
F EBDAT Breakeven Sales-a)
G EBDAT Breakeven Units-b)
Optimistic
% Rev
Scenario
100.0% $ 1,500,000
50.0%
675,000
50.0% $
825,000
2011
1,200,000
600,000
600,000
Worst Case
% Rev
Scenario
100.0% $
600,000
50.0%
300,000
50.0% $
300,000
205,000
790,000
263,333
Page 3 of 4
-18.1% $
200,000
$
17.08%
$
(108,750)
-6.0%
(95,000)
500,000
$
-16.00%
$
790,000
263,333
405,000
27.00%
840,000
280,000
% Rev
100.0%
45.0%
55.0%
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.
Page 4 of 4