Question

Calculate the accounting break-even, the cash break-even and the financial break-even

      points for this project. The company’s required return is 9% and the project will run

      for 5 years. Round your answer up to the next highest integer. Ignore any tax effects

      in calculating the cash break-even.

                                    Unit Variable              Annual Fixed              Equipment

Unit Price                           Cost                            Costs                          Cost

$ 3,020                             $ 2,275                   $ 9,000,000                 $ 3,100.000

Answer 1

We can calculate the desired result as follows:

Accounting Break Even Point = Fixed costs including depreciation / Contribution margin per unit

Contribution Per Unit = Unit Price - Unit Variable Cost

= 3,020 - 2,275

= $ 745

Equipment Cost is consiered to be Depreciation expense incurred on the machine.

Fixed costs including depreciation = 9,000,000 + 3,100,000

= $ 12,100,000

Accounting Break Even Point = 12,100,000 / 745

= 16241.61 Units

B) Cash break-even point is follows:

= Fixed costs / Contribution margin per unit

= 9,000,000 / 745

= 12,080.54 Units

C) Financial break even point is the point where the firm is neither making profits nor running in losses:

Financial break even point = Fixed Costs / Unit Price - Unit Variable Cost

= 9,000,000 / (3020 - 2,275)

= 9,000,000 / 745

= 12080.54 Units