## Step 1: Identify and Set Up Key Assumptions ### **Explanation:** First, pull out all the key assumptions from the instructions and set them up in your spreadsheet (or notes) for easy reference. These will drive your forecast calculations. **Key Assumptions:** - **Sales growth rates (2025-2027):** 15%, 30%, 35% - **Operating expenses (% of sales):** 2025 = 2023 level, 2026 = 2025 - 1%, 2027 = 2026 - 1% - **COGS (% of sales):** 2025 = 2024 level, 2026 = 2025 - 3%, 2027 = 2026 - 3% - **Tax rate:** 40% - **Interest expense:** $400/year - **No dividends/new stock issued** - **Bank loan & LT debt:** Constant - **A/R days:** 2025 = 2024 days, 2026 = 2025 - 3 days, 2027 = 2026 - 3 days - **Inventory days:** 2025 = 2024 days, 2026 = 2025 - 3 days, 2027 = 2026 - 3 days - **A/P days:** 2025-2027 = 2024 days - **Net fixed assets & accruals:** Use 2024 % of sales for 2025-2027 - **Required cash:** Fixed at $100 - **Calculate Additional Funds Needed as plug** - **Breakeven 2025:** - Operating expenses = fixed costs - Average price/unit = $60 **Why?** Setting up these assumptions first ensures your projections are consistent and easy to update if any parameter changes. --- ## Step 2: Calculate 2025 Breakeven Revenues and Units ### **Explanation:** Next, use the breakeven formula to calculate the required revenue and units in 2025. The breakeven point is where: \[ \text{Breakeven Units} = \frac{\text{Fixed Costs}}{\text{Price per Unit} - \text{Variable Cost per Unit}} \] - **Fixed Costs:** Use 2025 operating expenses as fixed costs (from your assumption). - **Price per Unit:** $60 - **Variable Cost per Unit:** Use 2025 COGS % of sales ### **Example Calculation:** Suppose (as an example) in 2025: - Operating expenses (fixed costs) = $500,000 - COGS % of sales = 50% - Price per unit = $60 Calculate variable cost per unit: \[ \text{Variable cost per unit} = \text{COGS %} \times \text{Price per Unit} = .50 \times 60 = \$30 \] Calculate breakeven units: \[ \text{Breakeven Units} = \frac{500,000}{60 - 30} = \frac{500,000}{30} = 16,667 \text{ units} \] Calculate breakeven revenue: \[ \text{Breakeven Revenue} = \text{Breakeven Units} \times \text{Price per Unit} = 16,667 \times 60 = \$1,000,020 \] **Why?** This tells you how much you need to sell (in dollars and units) in 2025 to cover all costs and break even. --- ## **Final Answer** **Step 1:** Gather all forecast assumptions from the assignment and organize them for use in your projections. **Step 2:** Use the breakeven formula with your 2025 operating expenses (as fixed costs), COGS % (as variable cost), and price per unit to find the breakeven units and revenue for 2025: - **Breakeven Units (2025):** \( \frac{\text{Operating Expenses}}{\text{Price per Unit} - \text{COGS per Unit}} \) - **Breakeven Revenue (2025):** Breakeven Units × Price per Unit > **Substitute your actual numbers from the spreadsheet to get the final values.**