he Cold Experience, Inc., a leading manufacturer of frozen dessert products, is considering the addition of a new product: frozen yogurt. The firm estimates that each cup will sell for $2 and that the variable costs per cup will be 70% of the selling price. The firm expects to sell at least 10M cups the first year and that the marginal tax rate will be 40%. The firm wants to maintain its current degree of financial leverage of 1.5 and a maximum degree of combined leverage of 4.5. The firm expects to pay $300,000 in preferred dividends and has 1 million shares of common stock outstanding.
a) Create an income statement for the new frozen yogurt’s first year using the information provided.
b) Determine the operating break-even point in units and also in dollars.
c) How many cups would The Cold Experience, Inc. need to sell in order to achieve earnings before interest and taxes of $3M?
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