A project has the following estimated data: price = $50 per unit; variable costs

Question

A project has the following estimated data: price = $50 per unit; variable costs = $33 per unit; fixed costs = $22,000; required return = 10 percent; initial investment = $21,000; life = three years. Ignoring the effect of taxes, what is the accounting break-even quantity? (Do not round intermediate calculations. Round your answer to 2 decimal places, e.g., 32.16.) Break-even quantity What is the cash break-even quantity? (Do not round intermediate calculations. Round your answer to 2 decimal places, e.g., 32.16.) Break-even quantity What is the financial break-even quantity? (Do not round intermediate calculations. 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? (Do not round intermediate calculations. Round your answer to 3 decimal places, e.g., 32.161.) DOL

Explanation / Answer

1.

Accounting breakeven quantity = Fixed costs / Contribution margin per unit

Annual depreciation = Initial investment/Useful life = $21,000/3 years = $7,000

Total fixed costs = $22,000 + $7,000 = $29,000

Contribution margin per unit = Selling price – Variable cost per unit = $50 - $33 = $17 per unit

Accounting breakeven quantity = $29,000/$17 = 1705.88 = 1,706 units

2.

Cash breakeven point = Cash fixed costs/ Contribution margin per unit

Since Depreciation is a not a cash expense, it shall be ignored for the calculation of fixed costs.

Cash breakeven quantity = $22,000/$17 = 1294.12 = 1,294 units

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