Your buddy comes to you with a sure-fire way to make some quick money and help p

Question

Your buddy comes to you with a sure-fire way to make some quick money and help pay off your student loans. His idea is to sell T-shirts with the words "I get" on them. "You get it?" He says, "You see all those bumper stickers and T-shirts that say 'got milk' or got surf.' So this says, 'l get. It's funnyl All we have to do is buy a used silk screen press for $6,600 and we are in business! Assume there are no fixed costs, and you depreciate the $6,600 in the first period. Taxes are 34 percent. a. What is the accounting break-even point if each shirt costs $5.50 to make and you can sell them for $11.00 apiece? (Do not round intermediate calculations and round your answer to the nearest whole number, e.g., 32.) Accounting break-even point 1200 units Now assume one year has passed and you have sold 6,000 shirts! You find out that the Dairy Farmers of America have copyrighted the "got milk" slogan and are requiring you to pay $20,000 to continue operations. You expect this craze will last for another two years and that your discount rate is 11 percent. b. What is the financial break-even point for your enterprise now? (Do not round intermediate calculations and round your answer to the nearest whole number, e.g., 32.) Financial break-even point units eBook & Resources

Explanation / Answer

Answer to Part b.

Financial Break Even Point = [EAC + FC * (1- Tax Rate) - Depreciation (1 – Tax Rate)] / (SP – VC) * ( 1 – Tax Rate)
EAC = Initial Investment / 2- Year Annuity Factor at 11%
EAC = 20,000 / 1.7125
EAC = $11,678.33

Financial Break Even Point = [11,678.33 + 0 - 0] / [(11 – 5.50) * (1 – 0.34)]
Financial Break Even Point = 11,678.33 / (5.50 * 0.66)
Financial Break Even Point = 11,678.33 / 3.63
Financial Break Even Point = 3,217.17 OR 3,217 units

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