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 six years. The depreciation schedule for the machine is straight line with no salvage value. The machine costs $420,000. The sales price per pair of shoes is $60, while the variable cost is $27. $150,000 of fixed cost per year is attributed to the machine.

Assume that the corporate tax rate is 34 percent and the appropriate discount rate is 8 percent. What is the present value break-even point?

Explanation / Answer

Selling Price 60 Variable Cost 27 Contribution 33 Fixed Cost 150000 PV Ratio (33 / 60 *100) = 55% Break Even Sales = Fixde Cost / PV Ratio = 150000 / 55% = $272,727 BEP in Units = Fixed Cost / Contribution per Unit = 150000 / 33 = 4545 Units Sales (60 * 4545) 272727 Variable Cost (27*4545) 122727 Contribution 150000 Fixed Cost 150000 Income 0 Sales = 272727 Discount Rate 8% (1/1.08 ^1) = 272727 * 0.9259259 Present Value Of BEP Sales = $252,525 Note: Break Even Sales means there is no profit and no loss. If profit is not there tax is Nil. Thats why I didn't considered tax 34%. Thank yoy....... Selling Price 60 Variable Cost 27 Contribution 33 Fixed Cost 150000 PV Ratio (33 / 60 *100) = 55% Break Even Sales = Fixde Cost / PV Ratio = 150000 / 55% = $272,727 BEP in Units = Fixed Cost / Contribution per Unit = 150000 / 33 = 4545 Units Sales (60 * 4545) 272727 Variable Cost (27*4545) 122727 Contribution 150000 Fixed Cost 150000 Income 0 Sales = 272727 Discount Rate 8% (1/1.08 ^1) = 272727 * 0.9259259 Present Value Of BEP Sales = $252,525

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