A project has the following estimated data: price = $54 per unit; variable costs

Question

A project has the following estimated data: price = $54 per unit; variable costs = $34 per unit; fixed costs = $17,000; required return = 15 percent; initial investment = $30,000; life = five years.

Ignoring the effect of taxes, what is the accounting break-even quantity? (Round your answer to 2 decimal places. (e.g., 32.16))

Break-even quantity 850 What is the cash break-even quantity? (Round your answer to 2 decimal places. (e.g., 32.16))

Break-even quantity 45900 What is the financial break-even quantity? (Round your answer to 2 decimal places. (e.g., 32.16))

Break-even quantity 1075 What is the degree of operating leverage at the financial break-even level of output? (Round your answer to 3 decimal places. (e.g., 32.161)) DOL 4.78

Explanation / Answer

Calculation of accounting break even quantity

  At Break-even: Sales = Variable cost + Fixed cost

Let the no. of units be ‘X’

Given Price = $54 per unit

Variable cost =$34 per unit

Fixed Cost   = $17000

54x=34x+17000

No. of units = 850

Cash Break-even Quantity is same as there are no non-cash expenses Cash break-even point is =54*850 = $45900

Calculation of Financial Break-even point:

Financial   Break-even point cash break-even point + (Operating cash flow/S.P – V.C)

                                            = 850+ (4500/ (54-34)) = 1075

Annual Operating cash Flow = 30000*15% = $4500

Calculation of degree of operating leverage at financial break-even:

Degree of operating leverage = sales-variable cost/ (sales-variable cost-fixed cost)

                                           Sales =1075*54 = 58050

                                            Variable cost =1075*34 =36550

Operating leverage = 58050-36550/(58050-36550-17000)

                              =4.78

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