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 $46,000 per boat. The variable costs will be about half that, or $23,000 per boat, and fixed costs will be $1,000,000 per year. The Base Case: The total investment needed to undertake the project is $3,900,000. 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 20 percent required return on new projects. Q = FC + OCF - TXD/1 - T/P-v 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.)

Explanation / Answer

Wetway Sailboat Corporation All Amounts in $ Assume the breakeven units as X Cash Breakeven Point is a sales value where Revenues = Total Costs Revenues 46000 X Total Costs Variable Costs 23000 X Fixed Costs 1000000 Interest on Project 780000 Thus, 46000 X = 23000 X + 1,000,000 + 780,000 Hence, 23000X = 1,780,000 or X = 1,780,000 / 23000 = 77 boats At this level of sales, the costs will be 23,000 X 77.39 + $ 1,000,000 + $ 780,000 = 3559970 $ Accounting Breakeven Point is a sales value where Revenues = Total Costs Net of Tax Revenues 46000 X Total Costs Variable Costs 23000 X Fixed Costs 1000000 Interest on Project 780000 Depreciation 780000 Thus, 46000 X = (23000 X + 1,000,000 + 780,000 + 780,000) X 62% Hence, 46,000 X - 14,260 X = 62% of $ 2,560,000 or 1587200 Thus, 31,740 X = 1,587,200 or X = 50.01 boats At this level of breakeven sales, the costs will be =23000 X 50.0063 + $ 2,560,000 = 3710145 $ Financial Breakeven Point will be a value where Revenues = Total Costs Revenues 46000 X Total Costs Variable Costs 23000 X Fixed Costs 1000000 Thus, 46000 X = 23000 X + 1,000,000 Hence, 23000 X = 1,000,000 or X = 43.48 boats At this level of breakeven sales, the costs will be =23000 X 43.48 + $ 1,000,000 = 2000000 $

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