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A project has the following estimated data: price = $97 per unit; variable costs

ID: 2701294 • Letter: A

Question

A project has the following estimated data: price = $97 per unit; variable costs = $36.86 per unit; fixed costs = $5,200; required return = 14 percent; initial investment = $10,000; life = seven years. Ignoring the effect of taxes, the accounting break-even quantity is ? units. (Round your answer to 2 decimal places.)

The cash break-even quantity is ? units. (Round your answer to 2 decimal places)

The financial break-even quantity is ? units. (Round your answer to 2 decimal places.)

The degree of operating leverage at the financial break-even level of output is ?. (Round your answer to 3 decimal places!!!!!!)

Explanation / Answer

a. The total variable cost per unit is the sum of the two variable costs, so:

Total variable costs per unit = $4.68 + 2.27

Total variable costs per unit = $6.95

b. The total costs include all variable costs and fixed costs. We need to make sure we are

including all variable costs for the number of units produced, so:

Total costs = Variable costs + Fixed costs

Total costs = $6.95(320,000) + $650,000

Total costs = $2,874,000

c. The cash breakeven, that is the point where cash flow is zero, is:

QC = $650,000 / ($11.99 %u2013 6.95)

QC = 128,968 units

And the accounting breakeven is:

QA

= ($650,000 + 190,000) / ($11.99 %u2013 6.95)

QA

= 166,667 units

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