A project has the following estimated data: price = $79 per unit; variable costs

Question

A project has the following estimated data: price = $79 per unit; variable costs = $46.61 per unit; fixed costs = $5,600; required return = 12 percent; initial investment = $6,000; life = six years. Ignore the effect of taxes.

Required: (a) What is the accounting break-even quantity? (Do not round your intermediate calculations.)

(b) What is the cash break-even quantity? (Do not round your intermediate calculations.)

(c) What is the financial break-even quantity? (Do not round your intermediate calculations.)

(d) What is the degree of operating leverage at the financial break-even level of output? (Do not round your intermediate calculations.)

Explanation / Answer

Break Even Analysis Details Amt $ m Selling price/unit              79.00 n Variable cost/unit              46.61 o Contribution /unit              32.39 p Fixed cost        5,600.00 Ans a Accounting Break Even Qty =p/o                  173 Initial investment        6,000.00 Life in yrs                 6.00 q Depreciation /year        1,000.00 p Fixed cost        5,600.00 less : depreciation/year        1,000.00 r Cash Fixed costs=p-q        4,600.00 Ans b. Cash Break even qty = r/o =                  142 Financial Braek Even At finacial break even point, EBIT = Fixed financial charges Investment        6,000.00 Required return 12% Fixed financial charge /year            720.00 Say x units is the financial break even qty So contribution for x unit= 32.39*x 32.39*x-5600=720 or , x =195 Ans c So Financial Break even qty=            195.00 Degree of opearting leverage at financial break even point= Contribution/Operating Profit Contribution        6,316.00 Opearating profit =            720.00 Ans d Degree of opearting leverage =                 8.77

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