Modern Artifacts can produce keepsakes that will be sold for $80 each. Nondeprec
ID: 2762587 • Letter: M
Question
Modern Artifacts can produce keepsakes that will be sold for $80 each. Nondepreciation fixed costs are $1,100 per year and variable costs are $60 per unit.
a. If the project requires an initial investment of $4,000 and is expected to last for 5 years and the firm pays no taxes. The initial investment will be depreciated straight-line over 5 years to a final value of zero, and the discount rate is 12%. What are the accounting and NPV break-even levels of sales? (Do not round intermediate calculations. Round your answers to the nearest whole number.)
b. What will be the accounting and NPV break-even levels of sales, if the firm's tax rate is 40%? (Do not round intermediate calculations. Round your answers to the nearest whole number.)
Explanation / Answer
Solution :
SP
80
VC
- 60
CONTRIBUTION MARGIN
20
Fixed cost 1100+800
1,900
Accounting BEP (FC/CM)=1900/20
95
UNITS
Let X be the BEP sales
CONTRIBUTION MARGIN
(20X)*3.60478
72.10X
Fixed cost 1100+800
1100*3.60478
3,965
BEP equation 72.10X-3965=0
NPV BEP in units (3965/72.10)
55
units
SP
80
VC
- 60
CONTRIBUTION MARGIN
20
Fixed cost
1,900
(20X-1900)*60% = 0
12X-1140=0
1,140
X=1140/12
X= ACCOUNTING BEP
95
UNITS
Let X be the BEP sales
CONTRIBUTION MARGIN
(20X)*3.60478
72
Fixed cost
1100*3.60478
3,965
TAX SHEILD ON DEP
800*40%*3.60478
1,154
72.0956X-3965.25-1153.53=0
NPV BEP in units
71
units
Year
Discount factor @ 12%
0
1.00000
1
0.89286
2
0.79719
3
0.71178
4
0.63552
5
0.56743
3.60478
SP
80
VC
- 60
CONTRIBUTION MARGIN
20
Fixed cost 1100+800
1,900
Accounting BEP (FC/CM)=1900/20
95
UNITS
Let X be the BEP sales
CONTRIBUTION MARGIN
(20X)*3.60478
72.10X
Fixed cost 1100+800
1100*3.60478
3,965
BEP equation 72.10X-3965=0
NPV BEP in units (3965/72.10)
55
units
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