Question

A company is considering a 5-year project that opens a new product line and requires an initial outlay of $84,000. The assumed selling price is $99 per unit, and the variable cost is $55 per unit. Fixed costs not including depreciation are $21,000 per year. Assume depreciation is calculated using stright-line down to zero salvage value. If the required rate of return is 11% per year, what is the financial break-even point? (Answer to the nearest whole unit.)

Answer 1

Step 1		1	2	3	4	5
	Sale price	99	99	99	99	99
	variable cost	55	55	55	55	55
	Contribution	44	44	44	44	44
	No.of Units	x	x	x	x	x
	Total Contribution                                                                                           (A)	44x	44x	44x	44x	44x
		-	-	-	-	-
	Fixed cost                                                                                                            (B)	21000	21000	21000	21000	21000
	Cash flow (A-B)	44x-21000	44x-21000	44x-21000	44x-21000	44x-21000
	P.v.(Required Rate of return 11%)	0.901	0.817	0.731	0.659	0.593
	No. of units in each yr where ;
		p.v.of cash inflow is = p.v.of cash outflow
		162.844x=105000+77721
		x=1122 units
step 2	Calculation of Break Even Point
	yrs.	Cash Flow		Cumulative cash flow	Outflow to be covered
	1	(1122*44)*.901	44480.568	44480.568
	2	(1122*44)*.817	40333.656	84814.224	105000 covered here by i.e. in mid of 2nd & 3rd yr.
	3	(1122*44)*.731	36088.008	120902.232
	4	(1122*44)*.659	32533.512	153435.744
	5	(1122*44)*.593	29275.224	182710.968
	By using Interpolation Technique;
	Fixed cost coverded in:	2.56 yrs.
	no of units	2.56 yrs *1122	(Assuming evenly production throught out the yr.)
		2872.32
		i.e.2873 units
	financial Break Even Point 2873 units