| Total Revenue | Variable Costs | Fixed Costs | Total Costs | Profit / | Variable Costs | Fixed Costs | Price | BEQ | ||
| Quantity | (Loss) | |||||||||
| 0 | $35 | $75,000 | $250 | |||||||
| 50 | ||||||||||
| 100 | ||||||||||
| 150 | ||||||||||
| 200 | Minimum Quantity | |||||||||
| 250 | ||||||||||
| 300 | ||||||||||
| 350 | ||||||||||
| 400 | ||||||||||
| 450 | ||||||||||
| 500 | ||||||||||
| 550 | ||||||||||
| 600 | ||||||||||
| 650 | ||||||||||
Breakeven
Your client, SmartClean, Inc., is a cleaning service for office and industrial locations. SmartClean has been in business for 5 years and has shown steady revenue growth each year. The owner originally started the business using a business loan. The owner has $10,000 remaining on the loan after steadily making payments and has an excellent personal and business credit history.
The owner wishes to expand the SmartClean business into three new territories, needs an infusion of capital, and is looking for $50,000 to make the expansion.
The expected fixed costs for the current business and expansion are $75,000. SmartClean’s average charge per job is $250.00. The variable cost per job is $35.00.
Conduct breakeven analysis (based on given price and costs) in this spreadsheet .
1) Complete the table below.
2) Calculate the BEQ.
3) Referring to the table you completed in part 1), what is the minimum quantity (in buckets of 50 jobs) you recommend to the owner to cover the remaining $10,000 loan?
| a) Owner Investment (No Financial Leverage) | b) Borrowed Funds (with Financial Leverage) | ||||
| Tax | 33% | ||||
| Sales | $50,000,000 | $50,000,000 | To Start | $80,000,000 | |
| Expenses | $35,280,000 | $35,280,000 | Borrowed | $40,000,000 | |
| Earnings before Interest and Taxes (EBIT) | Rate | 10% | |||
| Interest | |||||
| Earnings before Taxes (EBT) | |||||
| Taxes | |||||
| Net Earnings | |||||
| Return of Equity | |||||
A firm needs $80 million (M) to fund startup operations. Sales of $50M are expected with $35.28M in expenses. The firm’s tax rate is 33%.
1) What are net earnings and the return on equity if the owners provide the needed $80M?
2) What are net earnings and the return on equity if $40M of the needed $80M is borrowed at an interest rate of 10%?
Note:
Interest under the “Borrowed Funds” scenario is equal to 10% of the $40M of borrowed funds.
• Taxes are equal to 33% of Earnings before Taxes (EBT).
• Return on equity is calculated by dividing net earnings by owner’s equity. When financial leverage is used, owner’s equity is only the contribution from the owners. Borrowed funds are not considered equity.
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