Orange Company is evaluating its financing requirements for the coming year. The
ID: 2668429 • Letter: O
Question
Orange Company is evaluating its financing requirements for the coming year. The firm has been in business for only three years, and the firm’s chief financial officer (Erica Stevens) predicts that the firm’s operating expenses, current assets, and current liabilities will remain at their current proportion of sales.Last year Orange had $20 million in sales with net income of $1 million. The firm anticipates that next year’s sales will reach $27 million with net income rising to $2 million. Given its present high rate of growth, the firm retains all its earnings to help defray the cost of new investments.
The firm’s balance sheet for the year just ended is found below:
12/31/09
% of Sales
Current assets
$4,000,000
20%
Net fixed assets
8,000,000
40%
Total Assets
$12,000,000
Accounts payable
$3,000,000
15%
Long-term debt
2,000,000
NA
Total Liabilities
$5,000,000
Common stock
1,000,000
NA
Paid-in capital
1,800,000
NA
Retained earnings
4,200,000
NA
Total Equity
7,000,000
NA
Total Liability & Equity
$12,000,000
Estimate Orange’s total financing requirements for 2010 and its net funding requirements.
Orange Company is considering manufacturing communication equipment for the military. The average selling price of its finished product is $175 per unit. The variable cost for these same units is $140 per unit. This project incurs fixed costs of $550,000 per year.
What is the break-even point in units for the project?
What is the dollar sales volume the firm must achieve to reach the break-even point?
What would be the firm’s profit or loss at the following units of production sold: 12,000 units? 15,000 units? 20,000 units?
Explanation / Answer
Selling price per unit = $175
Variable cost per unit = $140
Fixed cost per year = $550,000
(1) What is the break-even point in units for the project?
Break-even point (in units) = [Fixed Cost / (Selling price per unit – Variable cost per unit)]
Break-even point (in units) = [$550,000 / ($175 - $140)]
Break-even point (in units) = [$550,000 / $35]
Break-even point (in units) = 15,714 units
(2) What is the dollar sales volume the firm must achieve to reach the break-even point?
Break-even point sales (in dollars) = [Fixed Cost / Contribution Ratio]
Contribution Ratio = [(Sales – Variable cost) / Sales]
Contribution Ratio = [($175 - $140) / $175]
Contribution Ratio = 0.20 (or) 20%
Break-even point sales (in dollars) = [$550,000 / 0.20]
Break-even point sales (in dollars) = $2,750,000
(3) What would be the firm’s profit or loss at the following units of production sold: 12,000 units? 15,000 units? 20,000 units?
12,000 units
15,000 units
20,000 units
Total Sales
$2,100,000
$2,625,000
$3,500,000
Less: Variable Cost
($1,680,000)
($2,100,000)
($2,800,000)
Fixed Cost
($550,000)
($550,000)
($550,000)
Profit (or) Loss
($130,000)
($25,000)
$150,000
12,000 units
15,000 units
20,000 units
Total Sales
$2,100,000
$2,625,000
$3,500,000
Less: Variable Cost
($1,680,000)
($2,100,000)
($2,800,000)
Fixed Cost
($550,000)
($550,000)
($550,000)
Profit (or) Loss
($130,000)
($25,000)
$150,000
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