Question

Spencer Tools would like to offer a special product to its best customers. It requires $55,000 of investment for new equipment.    The fixed costs are estimated at $21,000.   The product sells for $22.50 per unit and variable cost is $10 per unit. use 10% interest rate.

a) Using a 5-year depreciation schedule, what’s the depreciation?

b) What is the accounting breakeven units?

c) What’s the cash break-even units?

d) What’s the financial breakeven units?

e) What’s the OCF (payment) when NPV =0?

Answer 1

a

Depreciation per year = 55,000/5 = 11,000

b,c,d

Particulars	Accouting break even	Cash break even	Finance break even
Fixed costs	$          21,000	$          21,000	$          21,000
Depreciation	$          11,000		$          11,000
Interest cost			$            5,500
Contribution required	$          32,000	$          21,000	$          37,500
Divided by contribution per unit	$            12.50	$            12.50	$            12.50
Break even quantity	2,560	1,680	3,000

e

OCF = depreciation taken + interest = 11,000 + 5,500 = 16,500

please rate.