A project has the following estimated data: price = $97 per unit; variable costs
ID: 2701294 • Letter: A
Question
A project has the following estimated data: price = $97 per unit; variable costs = $36.86 per unit; fixed costs = $5,200; required return = 14 percent; initial investment = $10,000; life = seven years. Ignoring the effect of taxes, the accounting break-even quantity is ? units. (Round your answer to 2 decimal places.)
The cash break-even quantity is ? units. (Round your answer to 2 decimal places)
The financial break-even quantity is ? units. (Round your answer to 2 decimal places.)
The degree of operating leverage at the financial break-even level of output is ?. (Round your answer to 3 decimal places!!!!!!)
Explanation / Answer
a. The total variable cost per unit is the sum of the two variable costs, so:
Total variable costs per unit = $4.68 + 2.27
Total variable costs per unit = $6.95
b. The total costs include all variable costs and fixed costs. We need to make sure we are
including all variable costs for the number of units produced, so:
Total costs = Variable costs + Fixed costs
Total costs = $6.95(320,000) + $650,000
Total costs = $2,874,000
c. The cash breakeven, that is the point where cash flow is zero, is:
QC = $650,000 / ($11.99 %u2013 6.95)
QC = 128,968 units
And the accounting breakeven is:
QA
= ($650,000 + 190,000) / ($11.99 %u2013 6.95)
QA
= 166,667 units
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