Modern Artifacts can produce keepsakes that will be sold for $70 each. Nondeprec

Question

Modern Artifacts can produce keepsakes that will be sold for $70 each. Nondepreciation fixed costs are $2,400 per year, and variable costs are $35 per unit. The initial investment of $2,000 will be depreciated straight-line over its useful life of 5 years to a final value of zero, and the discount rate is 12%.

What is the accounting break-even level of sales if the firm pays no taxes? (Do not round intermediate calculations. Round your answer to the nearest whole number.)

What is the NPV break-even level of sales if the firm pays no taxes? (Do not round intermediate calculations. Round your answer to the nearest whole number.)

What is the NPV break-even level of sales if the firm’s tax rate is 40%? (Do not round intermediate calculations. Round your answer to the nearest whole number.)

Modern Artifacts can produce keepsakes that will be sold for $70 each. Nondepreciation fixed costs are $2,400 per year, and variable costs are $35 per unit. The initial investment of $2,000 will be depreciated straight-line over its useful life of 5 years to a final value of zero, and the discount rate is 12%.

Explanation / Answer

a) BEP = fc + dep / contribution = 2400 + 400/70-35 = 80 units

b) Cash flow = (70 Q - 35Q - 2400) + 400

At BEP, Present Cash flow = initial investment

so, [(70 Q - 35Q - 2400) + 400] *3.605 = 2000

on solving , Q = 73 units

c) BEP = fc + dep / contribution = 2400 + 400/70-35 = 80 units

d) cash flow = 0.60 (35Q - 2400) + 0.40 * 400 = 21Q - 1280

At BEP, Present Cash flow = initial investment

So, (21Q -1280) 3.605 = 2000

on solving , Q = 87.37 or 88 units

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