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 $8,300 and we are in business!” Assume there are no fixed costs and you depreciate the $8,300 in the first period. The tax rate is 21 percent.

  

a.

What is the accounting break-even point if each shirt costs $4.00 to make and you can sell them for $15.55 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 7,000 shirts! You find out that the Dairy Farmers of America have copyrighted the “got milk” slogan and are requiring you to pay $31,500 to continue operations. You expect this craze will last for another 5 years and that your discount rate is 14 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

Solution:

a)Calculation of accounting break even point:

Break even point=(Fixed cost+Depreciation)/(Sale price-Variable cost)

=($0+$7200)/($15.55-$4)

=626.09 or 626 units

b)Calculation of financial break even point

=[Investment/1-(1+discount rate)^-no. of years/Discount rate]+Fixed cost*(1-tax rate)-(Depreciation*tax rate)/(Sale price-Variable cost)(1-rax rate)

=[$31,500/1-(1+0.14)^-5/0.14]+$0+$0/($15.55-$4)(1-0.21)

=[$31500/3.433081]/$9.1245

=$9175.43/$9.1245

=1005.58 or 1006 units