Question

Apple wants to create the new iCar, a driverless car, by 2020.  Assume that fixed costs (research & development, the building of a factory, the purchasing of equipment, safety testing, etc) for such a project totals $10B.  If the company anticipates sales of 600,000 cars with variable costs per car of $75,000, how much does each car need to sell for to break even

2. If a company stated in its annual report to shareholders that it made efforts to recapitalize (that is, change the capital structure) to a higher amount of leverage, you could certainly look at the balance sheet to verify this.  What other financial statement, the income statement or statement of cash flows, would also show evidence?  Give an example of what the evidence might look like?   

Answer 1

Fixed costs (research & development, the building of a factory, the purchasing of equipment, safety testing, etc) for such a project totals $10B

Expected sales of 600,000 cars with variable costs per car of $75,000

To calculate the Selling Price of each car for breaking even,

Contribution = Fixed Costs

Sales Revenues -Variable costs = Fixed costs

600,000 * Selling price - 75,000*600,000 = 10 Billion

600,000 * Selling price = (10 + 45) billion

Selling price = 55 billion / 0.6 million = 91,666.67

If a company stated in its annual report to shareholders that it made efforts to recapitalize (that is, change the capital structure) to a higher amount of leverage, you could certainly look at the balance sheet to verify this.  What other financial statement, the income statement or statement of cash flows, would also show evidence?  Give an example of what the evidence might look like?

Leverage will increase by issuing debt. This is clearly evident from the cash flow statement which will show Cash from financing activities to increase . This will be shown in the line item Issuance of debt as a cash in flow.

Also, if you compare the interest expense vs. the previous year, you could also refer to the income statement. But, this is less of an evidence as compared to that of the cash flow statement

Kindly reach out if you have any doubts / clarifications to seek.