A project has the following estimated data: price = $64 per unit; variable costs

Question

A project has the following estimated data: price = $64 per unit; variable costs = $42 per unit; fixed costs = $15,000; required return = 15 percent; initial investment = $28,000; life = four years. Ignoring the effect of taxes, what is the accounting break-even quantity? (Round your answer to 2 decimal places. (e.g., 32.16)) Break-even quantity What is the cash break-even quantity? (Round your answer to 2 decimal places. (e.g., 32.16)) Break-even quantity What is the financial break-even quantity? (Round your answer to 2 decimal places. (e.g., 32.16)) Break-even quantity What is the degree of operating leverage at the financial break-even level of output? (Round your answer to 3 decimal places. (e.g., 32.161)) DOL

Explanation / Answer

Price , P =$64

Variable cost per unit, VCPU = $42

Fixed Cost, FC=$15,000

Initial Investment = $28,000

Life = 4 years

Depreciation = $7000

Accounting Break Even Point

Accounting BEP= FC/(P-VCPU) = 15000/(64-42) = 15000/22 = 681.82 units

Cash Break Even Point

Cash BEP= (FC-Depreciation)/(P-VCPU) = 8000/(64-42) = 363.63 units

Financial BEP

The level of production where the required return is generated

Rquired return = 15% of 28000 = $4200

4200 = PxN-VCPUxN-(15000-7000)

N= 554.45 units

DOL is the ratio of Fixed Cost to Variable cost

DOL at financial break even is = 15000/(554.45 x 42) = 0.64

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