Break-even analysis<?xml:namespace prefix = o ns = \"urn:schemas-microsoft-com:o

Question

Break-even analysis<?xml:namespace prefix = o ns = "urn:schemas-microsoft-com:office:office" />

Given the following information:

A             6,260 _______     $58          $98,000             $22,000

B             770         $990       ______   $498,000           $99,000

C             1,980     $20            $14        $4,500                 _______

D             1,980     $20              $8 ________                             $15,000

A.      Calculate the missing information for each of the above projects.

B.      Note that Projects C and D share the same accounting break-even. If sales are above the break-even point, which project would you prefer?  Explain Why.

C.      Calculate the cash break-even for each of the above projects. What do the differences in accounting and cash break-even tell you about the four projects?

Explanation / Answer

the rule is this:

Price per unit*B-E units - Variable cost per unit*B-E units - Fixed Cost - Depreciation = $0

use this rule ang get these values

b) comparing C and D, D is better if sales are above break even, because D has lower variable costs

c) we use this formula to get cash break even point

cash break eve = fixed costs/contribution margin

and contribution margin is price - variable cost

hence we get

cash break even point is lower than accounting break even point. In case of C and D we notice that cash break even points are much lower than accounting, this means that firm will be able to pay all its expenses even while incurring losses, meaning that the firm will be able to run even while making losses

project BE units price var cost fix cost depr A 6260 $77 $58 $98,000 $22,000 B 770 $990 $215 $498,000 $99,000 C 1980 $20 $14 $4,500 $7,380 D 1980 $20 $8 $8,760 $15,000

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