Question

Your buddy comes to you with a sure-fire way to make some quick money and help pay off your student loans. His idea is to sell T-shirts with the words “I get” on them. “You get it?” He says, “You see all those bumper stickers and T-shirts that say ‘got milk’ or ‘got surf.’ So this says, ‘I get.’ It’s funny! All we have to do is buy a used silk screen press for $9,000 and we are in business!” Assume there are no fixed costs and you depreciate the $9,000 in the first period. The tax rate is 23 percent.

  

a.

What is the accounting break-even point if each shirt costs $4.35 to make and you can sell them for $15.90 apiece? (Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.)

b.

Now assume one year has passed and you have sold 7,700 shirts! You find out that the Dairy Farmers of America have copyrighted the “got milk” slogan and are requiring you to pay $29,000 to continue operations. You expect this craze will last for another 3 years and that your discount rate is 15 percent. What is the financial break-even point for your enterprise now? (Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.)

Answer 1

Answer:

		No. of Units
a.	Accounting Break Even- Point	779.22
b.	Financial Break Even Point	1428.11

Working:

Answer a:

Contribution per shirt = Sale price - Variable cost per shirt = 15.90 - 4.35 = $11.55

Accounting break-even point = Fixed cost / Contribution per shirt = 9000 / 11.55 = 779.22 units

Accounting break-even point = 779.22 units

Answer b:

A year has passed:

Machine cost has been recovered in Year 1

Initial investment = $29,000

Contribution per unit = $11.55

Let us assume financial break-even point = X

Annul cash flows = (X * 11.55) * (1-23%)

= 8.8935* X

At financial break-even point, NPV = 0

Project period = 3 years

Hence:

=> 0 = 8.8935* X * (1 - 1 /(1 + 15%) 3) / 15% - 29,000

=> 0 = 20.3065 X - 29,000

=> X = 29000 /20.3065 = 1428.11

Financial break-even point now = 1428.11 units