Niko has purchased a brand new machine to produce its High Flight line of shoes.

Question

Niko has purchased a brand new machine to produce its High Flight line of shoes. The machine has an economic life of five years. The depreciation schedule for the machine is straight-line with no salvage value. The machine costs $590,000. The sales price per pair of shoes is $60, while the variable cost is $14. $168,000 of fixed costs per year are attributed to the machine. Assume that the corporate tax rate is 34 percent and the appropriate discount rate is 8 percent.

What is the financial break-even point?

Niko has purchased a brand new machine to produce its High Flight line of shoes. The machine has an economic life of five years. The depreciation schedule for the machine is straight-line with no salvage value. The machine costs $590,000. The sales price per pair of shoes is $60, while the variable cost is $14. $168,000 of fixed costs per year are attributed to the machine. Assume that the corporate tax rate is 34 percent and the appropriate discount rate is 8 percent.

Explanation / Answer

Niko All amounts in $ Let us assume the number of units required to gain the financial break-even point as X The contribution margin per unit is $ 60 - $ 14 = $ 46 X Breakeven is a point at which Contribution Margin net of tax = Fixed Costs net of tax Hence, 66% X $ 34X = (66% of $ 168,000) Thus, 22.44 X = 11088 Hence, X = 494.1176 units or 494 units

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