A project has the following estimated data: price = $68 per unit; variable costs
ID: 2634001 • Letter: A
Question
A project has the following estimated data: price = $68 per unit; variable costs = $44 per unit; fixed costs = $18,000; required return = 10 percent; initial investment = $40,000; life = five years.
Ignoring the effect of taxes, what is the accounting break-even quantity?
What is the cash break-even quantity?
What is the financial break-even quantity?
What is the degree of operating leverage at the financial break-even level of output?
A project has the following estimated data: price = $68 per unit; variable costs = $44 per unit; fixed costs = $18,000; required return = 10 percent; initial investment = $40,000; life = five years.
Explanation / Answer
(1)
(68 - 44)*Q - 18,000 - 40,000/5 = 0
Q = 1083 units
(2)
(68 - 44)*Q - 18,000 = 0
Q = 750 units
(3)
(68 - 44)*Q*PVIFA10%,5 - 18,000*PVIFA10%,5 - 40,000 = 0
PVIFA10%,5 = (1 - (1 + 10%)^(-5))/10% = 3.7907867694
Q = 1190 units
(4)
operating leverage = (sales - costs)/(sales - costs - fixed cost) = (68 - 44)*1190/((68 - 44)*1190 - 18,000) = 2.70
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