Break even analysis The marvel Mfg. Company is considering whether or not to con

Question

Break even analysis

The marvel Mfg. Company is considering whether or not to construct a new robotic production facility. The cost of the new facility is $630,000 and it is expected to have a six-year life with annual depreciation expense of $105,000 and now salvage value. Annual sales from the new facility are expected to be 1,950 units with a price of $1,000 per unit. Variable production costs are $560 per unit, and while fixed cash expenses are $79,000 per year.

a.       Find the accounting and the cash break-even units of production.

b.      Will the plant make a profit based on its current expected level of operations?

c.       Will the plant contribute cash flow to the firm at the expected level of operations?

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Explanation / Answer

a)
for accounting break even units = (fixed cost + depreciation)/(price - variable cost per unit)
= (79000 + 105000)/(1000-560) = 418.18

for cash break even units = fixed cost/(price - variable cost per unit)
= 79000/560
= 141.07

b)
annual sales revenue = 1950 * 1000 = 1950000
annual cost of sales = 560*1950 + 79000 = 1171000
annual depreciation expense = 105000

annual income = 1950000-1171000 - 105000 = 674000

yes the firm will make a gross profit of 674000
c)
cash flow = sales - cost of sales = 1950000-1171000 = 779000
yes the plant will contribute cashflow to the firm.

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