Question

(Break-even analysis)

Project	Accounting ​Break-Even Point​ (in units)	Price per Unit		Variable Cost per Unit	Fixed Costs		Depreciation
A	6, 230			​$52	​$102,000		​$26,000
B	760	​$1,000			​$499,000		​$103,000
C	1,970	​$25		​$13	​$5,000
D	1,970	​$25		​$7			​$17,000

a.  Calculate the missing information for each of the above projects.

b.  Note that Projects C and D share the same accounting​ break-even. If sales are above the​ break-even point, which project would you​ prefer? Explain why.

c.  Calculate the cash​ break-even for each of the above projects. What do the differences in accounting and cash​ break-even tell you about the four​ projects?

Answer 1

a. The price per unit for Project A is = 20.55 + 52 = 72.55

The variable cost per unit for Project B is = 1000 - 792.11 = 207.89

The depreciation for Project C is = 28640

The fixed costs for Project D is = 52640

Workings:

A. Break even point = Fixed costs + Depreciation/ Contribution per unit

6230 = (102,000 + 26,000) / Contribution

Contribution per unit = 20.55

B.

Break even point = Fixed costs + Depreciation/ Contribution per unit

760 = (499,000 + 103,000) / Contribution

Contribution per unit = 792.11

C, Break even point = Fixed costs + Depreciation/ Contribution per unit

1970 = (5,000 + Depreciation) / (25-13)

Depreciation= 28640

D. Break even point = Fixed costs + Depreciation/ Contribution per unit

1970 = (Fixed costs+ 17000) / (25-7)

Fixed costs= 52640

b.  We should prefer Project D because the contribution margin (Price per unit-Variable cost per unit) of project D is more which causes overall profit to increase.

c. Cash break even:

Cash break even point = Fixed costs/ Contribution

Project A : 102,000/ 20.55 = 4965 units

Project B : 499,000/ 792.11 = 630 units

Project C : 5000 / (25-13) = 417 units

Project D; 52640 / (25-7) = 2924 units