Question

Generate an income statement for a high tech shoe insert for top of the line

athletic shoes. Income statements usually include line items for at least gross

revenue, cost of goods sold (COGS), sales and marketing (S&M), general

administration (G&A), research and development (R&D), earnings before interest

and taxes (EBIT), interest and taxes, and net profit (or loss). You and a friend

decide to produce a new type of polymer for inserts in athletic shoes. You

estimate that in the first year you will need $750,000 to set up the plant and pay

for R&D costing $300,000. Starting in the second year, you have made

preliminary contractual arrangements to sell the inserts that cost you $1.10 each

for $5.50 to the major shoe manufacturers. About 3% of the US population uses

these athletic shoes can sell and you anticipate capturing 0.05%, 1%, 2%, 4%,

and 5% of the market in years 2 through 6, respectively. Assume that taxes and

interest will consume 50% of EBIT (only if you actually make a gross profit), S&M

will be 15% of gross profit, G&A will consume 10% of gross profit. Neglect the

time value of money and the cost of your salaries. Will you make a profit in year

5?