A project has the following estimated data: price=$72 per unit; variable costs=$

Question

A project has the following estimated data: price=$72 per unit; variable costs=$46 per unit; fixed costs=$21,000; required return=15 percent; initial investment =$42,000; life=six 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? Please show steps. A project has the following estimated data: price=$72 per unit; variable costs=$46 per unit; fixed costs=$21,000; required return=15 percent; initial investment =$42,000; life=six 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? Please show steps. A project has the following estimated data: price=$72 per unit; variable costs=$46 per unit; fixed costs=$21,000; required return=15 percent; initial investment =$42,000; life=six 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? Please show steps.

Explanation / Answer

Annual Depreciation = initial investment/useful life

Annual Depreciation = 42000/5

Annual Depreciation = 8400

Accounting break even quantity = (Fixed Cost+ Depreciation)/(Price - Variable cost)

Accounting break even quantity = (21000+8400)/(72-46)

Accounting break even quantity = 1130.77

Accounting break even quantity = 1131

Cash break even quantity = (Fixed Cost)/(Price - Variable cost)

Cash break even quantity = (21000)/(72-46)

Cash break even quantity = 807.69

Cash break even quantity = 808

Financial break even quantity = (initial investment/ PVIFA(15%,6) + Fixed Cost )/(Price - Variable cost)

Financial break even quantity = (42000/3.78448 + 21000)/(72-46)

Financial break even quantity = 1234.54

Financial break even quantity = 1235

Contribution Margin at Financial break even quantity = 1235*(72-46) = 32110

Degree of operating leverage = Contribution Margin at Financial break even quantity /(Contribution Margin at Financial break even quantity - Fixed Cost)

Degree of operating leverage = (32110/(32110-21000)

Degree of operating leverage = 2.89

Degree of operating leverage =

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