A project has the following estimated data: price = $62 per unit; variable costs

Question

A project has the following estimated data: price = $62 per unit; variable costs = $38 per unit; fixed costs = $23,000; required return = 15 percent; initial investment = $27,000; life = three years.

Ignoring the effect of taxes, what is the accounting break-even quantity?

What is the cash break-even quantity?

What is the financial break-even quantity?

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

A project has the following estimated data: price = $62 per unit; variable costs = $38 per unit; fixed costs = $23,000; required return = 15 percent; initial investment = $27,000; life = three years.

Explanation / Answer

Hi,

Please find the answers as follows:

A project has the following estimated data: price = $62 per unit; variable costs = $38 per unit; fixed costs = $23,000; required return = 15 percent; initial investment = $27,000; life = three years.

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Ignoring the effect of taxes, what is the accounting break-even quantity?

What is the cash break-even quantity?

What is the financial break-even quantity?

Part A:

Accounting break-even quantity = (23000 + 9000)/(62-38) = 1333.33 units

Part B:

Cash Break Even = Fixed Cost/Price - Variable Cost = 23000/(62-38) = 958.33 units

Part C:

We need to calculate OCF in the given case.

PV = - 27000

N = 3 years

R = 15%

FV = 0

PMT = ?

OCF = PMT(15%, 3, -27000, 0) = 11825.38

Financial break-even quantity

Q = (11825.38 - 9000 + 23000)/(62-38) = 1076.058 or 1076.06 units

Part D:

DOL = 1076.06*(62-38)/(1076.06*(62-38) - 23000 - 9000) = 0 (Since it cannot be negative)

Thanks.

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