A project has the following estimated data: price = $58 per unit; variable costs
ID: 2736013 • Letter: A
Question
A project has the following estimated data: price = $58 per unit; variable costs = $36 per unit; fixed costs = $20,000; required return = 10 percent; initial investment = $30,000; life = six years.
Ignoring the effect of taxes, what is the accounting break-even quantity? (Do not round intermediate calculations. Round your answer to 2 decimal places, e.g., 32.16.)
What is the financial break-even quantity? (Do not round intermediate calculations. Round your answer to 2 decimal places, e.g., 32.16.)
What is the degree of operating leverage at the financial break-even level of output? (Do not round intermediate calculations. Round your answer to 3 decimal places, e.g., 32.161.)
A project has the following estimated data: price = $58 per unit; variable costs = $36 per unit; fixed costs = $20,000; required return = 10 percent; initial investment = $30,000; life = six years.
Explanation / Answer
Contribution per unit= Sales – Variable cost=$58-$36=$22
Depreciation = Cost of Asset- Salvage value / Life of Asset
=$30,000-0/6
=$5,000
Accounting Breakeven point in units= Fixed cost+ Depreciation/ Contribution per unit
=$20,000+$5,000/22
=$25,000/22
=1,136 units
Cash break even point in unit = Fixed costs- Non-cash expenses/Selling price per unit - variable cost per unit.
=$20,000/22
=909 units
Note; Assumed Depreciatio not included in fixed cost
required retun=Investment x rate of return= $30,000 x 10%=$3,000
Financial Break even point =Fixed cost+ Depreciation+ required retun/Contribution per unit
=$20,000+$5,000+$3,000/22
=$28,000/22
=1,273 units
Degree of Operating Leverage= Sales- Variable Cost/ Sales – variable cost- Fixed cost
=Contribution/ Contribution- Fixed Cost
=22 x 1,273 /22 x 1,273-20,000
=28,006/28,006-20,000
=28,006/8,006
=1.4003
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