Niko has purchased a brand new machine to produce its High Flight line of shoes.

Question

Niko has purchased a brand new machine to produce its High Flight line of shoes. The machine has an economic life of four years. The depreciation schedule for the machine is straight-line with no salvage value. The machine costs $492,000. The sales price per pair of shoes is $59, while the variable cost is $13. $173,000 of fixed costs per year are attributed to the machine. Assume that the corporate tax rate is 40 percent and the appropriate discount rate is 7 percent.

  What is the financial break-even point?

Explanation / Answer

let no. of units be "a"

{a(59-13)-173,000-123,000}0.60 + 123,000 = 0

(46a-296,000)0.60+123,000 = 0

27.60a-177,600+123,000 = 0

a = 54,600/27.60 = 1,978.26 or 1,978 Shoes.

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