7. [Variable Expenses and Survival Revenues Breakeven] The Castillo Products Company had a very difficult operating year in 2015 resulting in a net loss of $65,000 on sales of $900,000. In 2016, sales jumped to $1,500,000 and a net profit after taxes was earned. The firm's income statements are below. CASTILLO PRODUCTS COMPANY 2015 2016 Net Sales I $900,000 $1,500,000 Cost of Goods Sold --540,000 -900,000 Gross Profit 360,000 600,000 Marketing -90,000 -150,000 General & Administrative -250,000 -250,000 Depreciation -40,000 -40,000 EBIT -20,000 160,000 Interest -45,000 -60,000 Earnings Before Taxes -65,000 100,000 Income Taxes 0 -25,000 Net Income (Loss) -$65,000 $75,000 "Includes tax loss carryforward from 2015. Requirements: "Includes tax loss carryforward from 2015. Requirements: 1. Calculate each income statement item for 2015 as a percentage of the 2015 sales level. Make the same calculations for 2016 stating each income statement item as a percentage of the 2016 sales of $1,500,000. Based on the percentages, determine which cost or expense items varied directly with sales for the two-year period making them Variable Costs? 2. Use the information from Requirement 1 to classify each specific expense item as being either variable costs or fixed costs. Then use the variable costs to calculate the Variable Cost Revenue Ratio (VCRR). Next determine the total of Cash Fixed Costs (CFC). Using the formula for Survival Revenues (SR), estimate Castillo's EBDAT breakeven (stated in terms of survival revenues) if interest expenses had remained at the 2015 level of $45,000 in 2016. Show calculations. (To check your answer, refer back to Power point slide 27 for an example.) 3. Estimate the dollar amount of survival revenues actually needed by the Castillo Products Company to reach EBDAT breakeven in 2016 given that more debt was obtained and interest expenses increased to $60,000. Show Calculations 4. Helpful Hints: For requirement A, you just need to divide each cost item on the income statement by net sales to determine its percentage of net sales (i.e. for 2015 divide COGS $540 by $900 to get 60% ). You do this for both years, 2015 and 2016. The line items that have the same percentage for both years indicates that those are the ones that are variable costs, meaning they vary directly with the amount of sales. For this problem, there will be two variable costs. Once you know which line items are variable costs, you know the others are considered fixed costs and can then determine which ones are the Cash fixed costs. At that point, you can calculate the VCRR by using total Variable costs divided by total sales. (This will be the same for both years.) Next you apply the Survival Revenue (EBDAT) breakeven formula to solve for the Breakeven amount of sales needed in the two scenarios for requirements B &C.