Chapter 13 Mini Case Working Papers FA19

Chapter 13 MINI CASE: JEN AND LARRY’S FROZEN YOGURT COMPANY (Revisited)
In 2016, Jennifer (Jen) Liu and Larry Mestas founded Jen 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 2016 and were estimated at $1.2 million in 2017.
Since Jen and Larry were selling premium frozen yogurt containing premium
ingredients, each small cup of yogurt sold for $3. The cost of producing the frozen
yogurt averaged $1.50 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 2017. 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 2017.
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) of $450,000 occurred at the beginning of 2016
along with $50,000 being invested in inventories. An additional equipment
investment of $100,000 was estimated to be needed at the beginning of 2017 to
make the amount of yogurt forecasted to be sold in 2017. Depreciation expenses
were expected to be $50,000 in 2017 and interest expenses were estimated at
$15,000. The tax rate was expected to be 25 percent of taxable income.
Chapter 13 Mini Case
A venture's profits can be measured in several different ways: Before interest and taxes (EBIT) or
net profit after taxes.
Exemplar Scenario shows how much EBIT and Net Profit Jen and Larry's is expected to earn in
2017.
For this problem, you should complete the financial statements for:
● Scenario 2 if sales reach $1.5 million.

● Scenario 3 if sales are only $800,000
Note: Cost of goods sold is: $1.50/$3.00 per unit = 50% of sales. The General and Administrative
Expenses, Marketing Expenses, and Depreciation Expense remain the same in each scenario.
Exemplar
Scenario 1 Scenario 2 Scenario 3
Net Sales $ 1,200,000 $ 1,500,000 $ 800,000
Cost of Goods Sold 600,000
Gross Profit $ 600,000
General and Administrative Expenses 180,000

Marketing Expenses 200,000
Depreciation Expense 50,000
Total Expenses 430,000
EBIT $ 170,000
Interest 15,000
Earnings before Taxes $ 155,000
Taxes (at 25%) 38,750

Net Profit $ 116,250
B. If inventories are expected to turn over ten-times a year (based on cost of goods sold),
what will be the venture’s average inventories balance next year if sales are $1.2 million?
Answer Solution:
Recall from Chapter 6 that the “inventory-to-sale conversion period” shows the average
number of days to turnover inventories. By dividing the inventory-to-sale conversion
period into a 365 day year we have the inventories turnover. Thus, if we know the
turnover, 365/10 gives the inventory-to-sale conversion period of 36.5 days.
The cost of goods sold is 50% of the sales. If sales are $1,200,000, then the cost of goods
sold (COGS) is $600,000. The average inventory balance is the COGS ($600,000) divided by
the turnover rate of 10 times per year, or $60,000.
B, contd. How much might the venture be able to borrow if a lender typically lends an
amount equal to 50 percent of the average inventories balance?
Answer:
B, contd. If the borrowing rate is 12 percent, how much dollar amount of interest would
have to be paid on the loan?
Answer:
How does this compare to the interest rate estimated in Part A?

C. How might the venture acquire and finance the new equipment that is needed?
Answer:
D. Identify potential government credit resources for the venture.
Answer:
E. What are some of the benefits and risks of Jen and Larry's continued use of credit card
financing
Answer:
F. How might the venture benefit from receivables financing if commercial customers are
extended credit for thirty days on their purchases?
Answer:
G. What is the impact of potential loan restrictions if the venture seeks commercial loan
financing?
Answer:
H. How might the venture be evaluated in terms of the five "Cs" of credit analysis?
Answer:

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Chapter 13 MINI CASE: JEN AND LARRY’S FROZEN YOGURT COMPANY (Revisited)

● Scenario 2 if sales reach $1.5 million.

General and Administrative Expenses 180,000

Taxes (at 25%) 38,750

How does this compare to the interest rate estimated in Part A?

D. Identify potential government credit resources for the venture.

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