A project has the following estimated data: price = $54 per unit; variable costs = $28.08...

A project has the following estimated data: price = $54 per unit; variable costs = $28.08 per unit; fixed costs = $6,600; required return = 11 percent; initial investment = $10,000; life = three years. Ignore the effect of taxes.

a. What is the accounting break-even quantity?

b. What is the cash break-even quantity?

c. What is the financial break-even quantity?

d. What is the degree of operating leverage at the financial break-even level of output?

Solutions

Expert Solution

Ignoring the effect of taxes

Depreciation - Assuming straight line Depreciation

Depreciation each year D = $10000/3 = $3333.33

a) Accounting BreakEven Quantity= (Fixed cost + Depreciation) / (Price -Variable cost)

=(6600+3333.33)/(54-28.08) = 383.23 or 384 units

b) Cash breakeven quantity = Fixed cost/(Price -Variable cost)

=6600/(54-28.08) = 254.6296 or 255 units

c) Financial Break even occurs when the NPV = 0

Let X units be the Financial Break even quantity

Cashflow each year

= (54-28.08)*X - 6600 (as there are no taxes depreciation does not affect Cashflows)

For Financial breakeven

NPV = -10000 + ((54-28.08)*X - 6600)/0.11*(1-1/1.11^3) = 0

=> ((54-28.08)*X - 6600)* 2.443715 = 10000

=> (54-28.08)*X = 4092.131+6600

=> X =10692.13/25.92 = 412.505 or 413 units

d) Degree of Operating leverage

= (Price - Variable costs)*X / ((Price-Variable Cost)*X -Fixed Cost)

=(54-28.08)*413/((54-28.08)*413-6600)

=2.6078

jeff jeffy answered 1 year ago

Next > < Previous

Related Solutions

A project has the following estimated data: price = $72 per unit; variable costs = $27.36...

A project has the following estimated data: price = $72 per unit; variable costs = $27.36 per unit; fixed costs = $8,000; required return = 14 percent; initial investment = $7,000; life = six years. Ignore the effect of taxes. a. What is the accounting break-even quantity? b. What is the cash break-even quantity? c. What is the financial break-even quantity? d. What is the degree of operating leverage at the financial break-even level of output?

A project has the following estimated data: price = $80 per unit; variable costs = $28.80...

A project has the following estimated data: price = $80 per unit; variable costs = $28.80 per unit; fixed costs = $5,500; required return = 10 percent; initial investment = $8,000; life = seven years. Ignore the effect of taxes. a. What is the accounting break-even quantity? b. What is the cash break-even quantity? c. What is the financial break-even quantity? d. What is the degree of operating leverage at the financial break-even level of output?

A project has the following estimated data: price = $75 per unit; variable costs = $29.25...

A project has the following estimated data: price = $75 per unit; variable costs = $29.25 per unit; fixed costs = $5,200; required return = 9 percent; initial investment = $9,000; life = seven years. Ignore the effect of taxes. a. What is the accounting break-even quantity? 142 114 170 156 135 b. What is the cash break-even quantity? 114 142 108 91 103 c. What is the financial break-even quantity? 153 184 168 138 122 d. What is the...

A project has the following estimated data: price = $79 per unit; variable costs = $41.87...

A project has the following estimated data: price = $79 per unit; variable costs = $41.87 per unit; fixed costs = $6,900; required return = 9 percent; initial investment = $10,000; life = six years. Ignore the effect of taxes. a. What is the accounting break-even quantity? b. What is the cash break-even quantity? c. What is the financial break-even quantity? d. What is the degree of operating leverage at the financial break-even level of output?

A project has a projected sales price of $99 a unit, variable costs per unit of...

A project has a projected sales price of $99 a unit, variable costs per unit of $58, annual fixed costs of $238,000, and annual depreciation of $139,000. The tax rate is 22 percent. What is the contribution margin for an analysis using sales units of 12,800? Multiple Choice $27.06 $38.97 $22.41 $41.00 $42.64

Sells price per unit=$200 variable manufacturing costs per unit= $50 variable S&A costs per unit= $10...

Sells price per unit=$200 variable manufacturing costs per unit= $50 variable S&A costs per unit= $10 Fixed MOH= $50,000 Fixed S&A costs=$10,000 Units produced=5000 Units sold= 4000 Produce a full absorption income statement, what is the operating income produce a variable costing income statement, what is the operating income if units produced exceeds untis sold, does full absorption accounting or varible cost account result in a higher operating income

Given the following information: Selling Price (per unit): $10,000 Variable Costs (per unit): $7,000 Fixed Costs:...

Given the following information: Selling Price (per unit): $10,000 Variable Costs (per unit): $7,000 Fixed Costs: $200,000 Required Each of these are separate situations: What is the break-even point in total sales in dollars? How many units need to be sold to make a profit of $20,000? How many units need to be sold to make a profit of $20,000 if fixed costs increase from $200,000 to $250,000? How many units would they need to sell if they wanted to...

Given the following information: Selling Price (per unit): $10,000 Variable Costs (per unit): $7,000 Fixed Costs:...

20-Spice Inc.'s unit selling price is $54, unit variable costs are $33, fixed costs are $120,000,...

20-Spice Inc.'s unit selling price is $54, unit variable costs are $33, fixed costs are $120,000, and current sales are 9,300 units. How much will operating income change if sales increase by 5,500 units? 30 The contribution margin ratio is the a.same as the variable cost ratio b.portion of equity contributed by stockholders c.same as the profit-volume ratio d.same as profit

1) A project has the following information. Price is $62 per unit, variable cost is $41...

1) A project has the following information. Price is $62 per unit, variable cost is $41 per unit, fixed costs is $15500, required return is 12%, initial investment $24000, project life is 4 years. Ignoring taxes, What’s accounting breakeven What’s cash breakeven What’s financial breakeven? What’s DOL at financial breakeven level? 2) A stock has a beta of 1.05. The expected return of the market is 10%, and risk free rate is 3.8%. What’s the expected return of the stock?...

Subjects