Question

1. A product sells for $5 per unit.  The variable cost of production is $3 per unit.  Total fixed costs per year are $1000, including depreciation expense of $200. What is the cash flow breakeven point in units and in dollars?

   	A.	400 units and $2000.
   	B.	267 units and $1333.
   	C.	500 units and $2500.
   	D.	333 units and $1665.

Answer 1

SOLUTION:

The values provided in the question are as follows:

Sales price per unit = $5

Variable cost per unit = $3

Total fixed costs per year = $1000 (including depreciation expense of $200.)

The cash flow breakeven point in units and in dollars =?

The formula to calculate cash flow breakeven point in units is as follows:

Cash flow breakeven point in units = (Fixed Costs- Depreciation) / (Sales Price per Unit - Variable Costs per unit)

Using the values,

Cash flow breakeven point in units= ($1,000-$200)/ ($5 - $3)

Cash flow breakeven point in units =$800/ $2

Cash flow breakeven point in units= 400

Cash flow breakeven point =400 units

The formula to calculate cash flow breakeven point in $ is as follows:

Cash flow breakeven point in $= cash flow breakeven point in units * Sales price per unit

Using the values,

Cash flow breakeven point in $= 400 units * $ 5,

Cash flow breakeven point in $= $2,000

So,

Cash flow breakeven point =400 units

Cash flow breakeven point in $= $2,000

Option ‘A’ will be correct