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 $40. The fixed costs incurred each year for factory upkeep and administrative expenses are $217,000. The machinery costs $2.6 million and is depreciated straight-line over 10 years to a salvage value of zero.

a)

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

b)

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 10%?

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

Explanation / Answer

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

Contribution margin = (Sell price - variable cost)

Contribution margin ratio = (100 - 40) - 60

Annual Deprciation = 2600000/10 = 260000

Accounting break-even level of sales = (Fixed Cost+Annual Deprciation)/Contribution margin

Accounting break-even level of sales = (217000+260000)/60

Accounting break-even level of sales = 7950

b)

Annual Cash Flow for NPV break-even level = Machinery cost/(1-(1+r)^-n)/r

Annual Cash Flow for NPV break-even level = 2600000/((1-(1+10%)^-10)/10%)

Annual Cash Flow for NPV break-even level = $ 423,138.03

NPV break-even level of sales = ( (Annual Cash Flow for NPV break-even level + Annual depreciation*tax rate)/(1-tax rate) + Fixed Cost ) / contribution Margin

NPV break-even level of sales = ((423138.03 + 260000*30%)/(1-30%))+ 217000)/60

NPV break-even level of sales = 15,548.52

Related Questions

Navigate

• Browse (All)
• Browse D
• Subjects

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.