Question

Big Town Industrial Supply is considering a new project with an initial investment of $1,000,000, and will produce a product that sells for $1,000 each, with variable costs of $700 per unit. The company uses straight-line depreciation, and the fixed assets are expected to have no salvage value when the project is complete. It is a 10-year project. Fixed costs are estimated to be $350,000 per year. The company’s required rate of return is 15%. Please show all of your work.

   ◦   What is the accounting break-even level of production?
   ◦   What is the Operating Cash Flow at accounting break-even?
   ◦   What is the cash break-even level of production?
   ◦   What is the financial break-even level of production?

Answer 1

Contribution per unit = $1,000 - $700 = $300

Break even point = required contribution / contribution per unit

Particulars	Accounting break even	Cash break even	Financial break even
Cash fixed costs	$ 350,000.00	$ 350,000.00	$ 350,000.00
Depreciation	$ 100,000.00	$                   -	$ 100,000.00
Required return on investment	$                   -	$                   -	$ 150,000.00
Required contribution	$ 450,000.00	$ 350,000.00	$ 600,000.00
Divided by contribution per unit	$          300.00	$          300.00	$          300.00
Break even point	1,500.00	1,166.67	2,000.00

Operating cash flow at accounting break even is equal to depreciation = $100,000

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