You are considering a new product launch. The project will cost $1,400,000, have

Question

You are considering a new product launch. The project will cost $1,400,000, have a 4 year life and have no salvage value; depreciation is straight-line to zero. Sales are projected at 180 units per year; price per unit will be $16,000, variable cost per unit will be $9,800 and fixed costs will be $430,000 per year. The required return on the project is 12% and the relevant tax rate is 35%. What is the accounting break-even level of output for this project? What is the degree of operating leverage at the accounting break-even point? How do you interpret this number?

Explanation / Answer

a)Accounting Break even =(Fixed cost+Depreciation)/(Price-Variable cost)
Accounting Break even =430,000/(16,000-9,800)
Accounting Break even =69.3569 units

b)

DOL = 1 + (FC / OCF)

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