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Break-even analysis<?xml:namespace prefix = o ns = "urn:schemas-microsoft-com:office:office" />

Given the following information:

             Acctng      price       Variable    Fixed        Depreciation

A             6,270 _______     $57          $103,000          $24,000

B             730         $950       ______   $496,000           $98,000

C             1,970     $21            $14        $4,900                 _______

D             1,970     $21              $8 ________                             $12,000

A.      Calculate the missing information for each of the above projects.

B.      Note that Projects C and D share the same accounting break-even. If sales are above the break-even point, which project would you prefer?  Explain Why.

C.      Calculate the cash break-even for each of the above projects. What do the differences in accounting and cash break-even tell you about the four projects?

Explanation / Answer

Break-even analysis

Given the following information:

A. Calculate the missing information for each of the above projects.

Proj A: COnt pu = (SP-VC) = (Fixed+Dep)/Acctg BE

So SP = (Fixed+Dep)/Acctg BE + VC = 77.26

Proj B : COnt pu = (SP-VC) = (Fixed+Dep)/Acctg BE

So VC = SP - (Fixed+Dep)/Acctg BE = 136.30

Proj C : Total COnt = (SP-VC)*Acctg BE = (Fixed+Dep)

So Dep = Total COnnt - Fxed = 8890

Proj D : Total COnt = (SP-VC)*Acctg BE = (Fixed+Dep)

So Fixed = Total COnnt - Dep = 13610

B. Note that Projects C and D share the same accounting break-even. If sales are above the break-even point, which project would you prefer? Explain Why.

As we see that COnt pu for Proj C is 21-14 = 7

& cont pu for Proj D is 21-8 = 13

So CM Ratio for Proj C = cont pu/SP = 7/21 = 33.33%

CM Ratio for D is 13/21 = 62%

So We projecte Proj D which has higher CM Ratio, a ssmall increase in sales will give more addl profit.

C. Calculate the cash break-even for each of the above projects. What do the differences in accounting and cash break-even tell you about the four projects?

Because CBE will treat depreciation as an

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