Your buddy comes to you with a sure-fire way to make some quick money and help p
ID: 2782897 • Letter: Y
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, ‘I get.’ It’s funny! All we have to do is buy a used silk screen press for $5,000 and we are in business!” Assume there are no fixed costs, and you depreciate the $5,000 in the first period. Taxes are 34 percent
What is the accounting break-even point if each shirt costs $3.90 to make and you can sell them for $9.40 apiece? (Do not round intermediate calculations and round your answer to the nearest whole number, e.g., 32.)
Now assume one year has passed and you have sold 4,400 shirts! You find out that the Dairy Farmers of America have copyrighted the “got milk” slogan and are requiring you to pay $12,000 to continue operations. You expect this craze will last for another two years and that your discount rate is 11 percent.
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., 32.14
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, ‘I get.’ It’s funny! All we have to do is buy a used silk screen press for $5,000 and we are in business!” Assume there are no fixed costs, and you depreciate the $5,000 in the first period. Taxes are 34 percent
Explanation / Answer
A) Accounting break even = Fixed cost + depriciation/ sales price- variable cost
=0+5000/9.4-3.9
=5000/5.5
=909.09 ie 909 units
Accounting break even = 909 units
B) When calculating the financial break-even point, we express the initial investment as an equivalent annual cost (EAC). The initial investment is the $12000 in licensing fees. Dividing the initial investment by the Two-year annuity factor, discounted at 11 percent, the EAC of the initial investment is:
Financial break-even point
= EAC + Fixed Costs(1 – tC ) – Depreciation(tC) / (Sales Price – Variable costs)((1 – tC)
7007.3+0 +0 / (9.4-3.9)(0.66)
=7007.3/3.63
=1930.38 units
EAC = Initial Investment/2-year annuity factor at 11% EAC = Initial Investment / PVIFA11%,2 EAC = 12000/1.7125 EAC = 7007.3Related Questions
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