Dime a Dozen Diamonds makes synthetic diamonds by treating carbon. Each diamond

Question

Dime a Dozen Diamonds makes synthetic diamonds by treating carbon. Each diamond can be sold for $100. The materials cost for a standard diamond is $50. The fixed costs incurred each year for factory upkeep and administrative expenses are $180,000. The machinery costs $1.3 million and is depreciated straight-line over 10 years to a salvage value of zero.

What is the accounting break-even level of sales in terms of number of diamonds sold?

What is the NPV break-even level of sales assuming a tax rate of 30%, a 10-year project life, and a discount rate of 12%? (Do not round intermediate calculations. Round your answer to the nearest whole number.)

a.

What is the accounting break-even level of sales in terms of number of diamonds sold?

Explanation / Answer

Soln:

Break even sales = fixed cost / contribution per unit X selling price

Contribution per unit = selling price - variable cost

Contribution per unit = $ 100 - $ 50 ($50)

Break even sales = $180,000/ $ 50 X $ 100

Break even sales = $ 360,000

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The NPV break-even level of sales = -$1,300,000 + 2,158,682.0

The NPV break-even level of sales = $ 858,682

year cash flows Depreciation per year Taxes per year 30% Operating cash flows = EBIT + Depreciation - taxes discount rate 12% Present value of cash flows 0 ($1,300,000) Earnings before interest & taxes 1 $360,000 $130,000 $108,000.0 $382,000.0 0.893 $341,126.0 2 $360,000 $130,000 $108,000.0 $382,000.0 0.797 $304,454.0 3 $360,000 $130,000 $108,000.0 $382,000.0 0.712 $271,984.0 4 $360,000 $130,000 $108,000.0 $382,000.0 0.636 $242,952.0 5 $360,000 $130,000 $108,000.0 $382,000.0 0.567 $216,594.0 6 $360,000 $130,000 $108,000.0 $382,000.0 0.507 $193,674.0 7 $360,000 $130,000 $108,000.0 $382,000.0 0.452 $172,664.0 8 $360,000 $130,000 $108,000.0 $382,000.0 0.404 $154,328.0 9 $360,000 $130,000 $108,000.0 $382,000.0 0.361 $137,902.0 10 $360,000 $130,000 $108,000.0 $382,000.0 0.322 $123,004.0 $2,158,682.0

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