In 2013, Jen Liu and Larry Mestas founded Jan and Larry’s Frozen Yogurt Company, which was based on the idea of applying the microbrew or microbatch strategy to the production and sale of frozen yogurt. Jen and Larry began producing small quantities of unique flavors and blends in limited editions. Revenues were $ 600,000 in 2013 and were estimated to be $ 1.2 million in 2014.
Each small cup of yogurt sold for $ 3, and the cost of producing the frozen yogurt averaged $ 1.5 per cup. Administrative expenses, including Jen and Larry’s salary and expenses for an accountant and two other administrative staff, were estimated at $ 180,000 in 2014. 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 2014.
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 occurred at the beginning of 2013. Additional equipment needed to make the amount of yogurt forecasted to be sold in 2014 was purchased at the beginning of 2014. As a result, deprecation expenses were expected to be $ 50,000 in 2014. Interest expenses were estimated at $ 15,000 in 2014. The average tax rate expected to be 25 percent of taxable income.
- Jen and Larry believe that under a worse-case scenario, yogurt revenues would at the 2013 level of $ 600,000 even after plans and expenditures were put in place to increase revenues in 2014. What would happen to the venture’s EBDAT?