A project has the following estimated data: price = $77 per unit; variable costs
ID: 2652704 • Letter: A
Question
A project has the following estimated data: price = $77 per unit; variable costs = $41.58 per unit; fixed costs = $7,600; required return = 12 percent; initial investment = $8,000; life = seven years.
Ignoring the effect of taxes, the accounting break-even quantity is units. (Round your answer to 2 decimal places. (e.g., 32.16)) The cash break-even quantity is units. (Round your answer to 2 decimal places. (e.g., 32.16)) The financial break-even quantity is units. (Round your answer to 2 decimal places. (e.g., 32.16)) The degree of operating leverage at the financial break-even level of output is . (Round your answer to 3 decimal places. (e.g., 32.161))
Explanation / Answer
Contribution Margin = Sale Price - Variable Cost
= 77 - 41.58
= $35.42
PV Ratio = Contribution / Sale * 100
= 35.42 / 77 * 100
=46 %
Accounting Break Even Point ( Units) = Fixed Cost / Contribution p.u
= 7600 / 35.42
= 214.57 units
Depreciation = 8000 / 7
= $1142.86
Cash Breakeven Point = ( Fixed Cost - Non Cash Fixed Cost ) / Contribution p.u
= (7600-1142.86) / 35.42
= 182.30 units
Financial Breakeven Point ( units) = Annual Interest / Contribution p.u.
= 8000* 0.12 / 35.42
= 27.10 units
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