Cecil’s Manufacturing is considering producing a new product. The sales price wo
ID: 2724426 • Letter: C
Question
Cecil’s Manufacturing is considering producing a new product. The sales price would be $9.95 per unit. The cost of the equipment is $124,000. Operating and maintenance costs are expected to be $3,800 annually. Based on a 7-year planning horizon and a MARR of 12%, determine the number of units that must be sold annually to achieve breakeven.
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Explanation / Answer
The following assumptions are taken as per details given
the cost of investment is $124,000
the number of years is 7
the MARR is 12%
the annual operating and maintenance cost is $3,800
the selling price per unit is $9.95
we have to first find out the annual net cash inflow at which received for 7 years at 12% will be equal to cost of investment
The present value of $ 1 received annually for 7 years at 12% is 4.5638
Therefore the formula to calculate net annual cash inflow
Net annual cash inflow x 4.5638 = cost of investment
Net annual cash inflow = cost of investment / 4.5638
Net annual cash inflow = 124000 / 4.5638
Net annual cash inflow = $27170
To calculate the gross cash inflow we will add annual operating and maintenance cost to net annual cash inflow
Gross annual cash inflow = $27170 + $3800
Gross annual cash inflow = 30970
Now to calculate break even units , we will use the formula
BEP in units = gross annual cash inflow / selling price per unit
BEP in units = 30970 / 9.95
BEP in units = 3113
The break even units to be sold annually is 3113 units
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