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A project has base-case earnings before interest and taxes of $36,408, fixed costs of $42,700, a...

A project has base-case earnings before interest and taxes of $36,408, fixed costs of $42,700, a selling price of $24 a unit, and a sales quantity of 22,000 units. All estimates are accurate within ±2 percent. Depreciation is $16,700. What is the base-case variable cost per unit?

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Expert Solution

Solution:

Given:

Base-Case Earnings Before Interest and Taxes (EBIT) of the Project = $36,408

Fixed Costs = $42,700

Selling Price Per Unit = $24

Sales Quantity = 22,000 units

Estimates Accuracy = ±2 percent.

Depreciation = $16,700

To Calculate:

The Base-Case Variable Cost Per Unit (VC).

Formula:

Base-Case Earnings Before Interest and Taxes (EBIT) = (Number of Units) × (Selling Price Per Unit - Variable Cost) - Fixed Cost – Depreciation

On putting the values in the formula, we get,

$ 36,408 = (22,000) × ($ 24 - Variable Cost) - $ 42,700 - $ 16,700

$ 36,408 = ($ 528,000 - 22,000 VC) - $ 59,400

$ 36,408 = $ 528,000 - $ 59,400 - 22,000 VC

$ 36,408 = $ 468,600 – 22,000 VC

22,000 VC = $ 468,600 - $ 36,408

22,000 VC = $ 432,192

Base-Case VC = $ 432,192 / 22,000

Base-Case Variable Cost = $ 19.64509 ≈ $ 19.65

The Base-Case Variable Cost Per Unit = $ 19.65

Ans: The Base-Case Variable Cost Per Unit = $ 19.65

jeff jeffy answered 1 year ago
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