Wettway Sailboat Corporation is considering whether to launch its new Margo-clas

Question

Wettway Sailboat Corporation is considering whether to launch its new Margo-class sailboat. The selling price will be $28,000 per boat. The variable costs will be about half that, or $14,000 per boat, and fixed costs will be $600,000 per year. The Base Case: The total investment needed to undertake the project is $2,400,000. This amount will be depreciated straight-line to zero over the five-year life of the equipment. The salvage value is zero, and there are no working capital consequences. Wettway has a 10 percent required return on new projects. 1formula16.mml Use the above expression to find cash, accounting and financial break-even points for Wettway Sailboat. Assume a tax rate of 38 percent. (Do not round intermediate calculations and round your answers to 2 decimal places, e.g., 32.16.)

Cash break-even

Accounting break-even

Financial break-even

Explanation / Answer

Cash Break Even Point:

Contribution Per Unit= Selling price per unit - variable cost per unit

                                           = $ 28,000 – $ 14,000 = $ 14,000

Cash BEP in Units= Fixed costs/ Contribution Per Unit

                                = $ 600,000/14,000 = 42.875

Cash BEP in $= Cash BEP in Units x Selling price per unit

                                  = 42.875 x 28,000 = $ 1,199,999.99 or $ 1,200,000

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Accounting Break Even Point:

Depreciation= Cost of Asset- Salvage Value/ Life of Asset

                              =2,400,000-0/5

                               =$480,000

Accounting BEP in Units= Fixed costs + Depreciation / Contribution Per Unit

                                             = 600,000 + 480,000 /14,000 = 1,080,000/14,000 = 77.142

Accounting BEP in $= Accounting BEP in Units x Selling price per unit

                                         = 77.142 x 28,000 = 2,159,999.99 or $ 2,160,000

Financial Break Even Point:

Required Return= Initial Investment x Required rate of return

                              =2,400,000 x10%=240,000

Financial BEP in Units= Fixed costs + Depreciation + Required Return / Contribution Per Unit

                                = 600,000 + 480,000 + 240,000 /14,000= 1,320,000/14,000 = 94.2857

Financial BEP in $= Financial BEP in Units x Selling price per unit

                                = 94.2857 x 28,000 = $ 2,640,000

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