Dime a Dozen Diamonds makes synthetic diamonds by treating carbon. Each diamond

Question

Dime a Dozen Diamonds makes synthetic diamonds by treating carbon. Each diamond can be sold for $120. The materials cost for a standard diamond is $60. The fixed costs incurred each year for factory upkeep and administrative expenses are $211,000. The machinery costs $2.0 million and is depreciated straight-line over 10 years to a salvage value of zero. What is the accounting break-even level of sales in terms of number of diamonds sold? (Do not round intermediate calculations.) What is the NPV break-even level of diamonds sold per year assuming a tax rate of 35%, a 10-year project life, and a discount rate of 10%? (Do not round intermediate calculations. Round your answer to the nearest whole number.)

Explanation / Answer

Part a)

Annual Depreciation = 2,000,000 / 10

                                         = 200,000

Depreciation tax shield = 200,000 x 35% = 70,000

At NPV breakeven level, NPV would be 0. And we need to compute OCF

NPV = OCF x PVIFA (n, R) – initial investment

0 = OCF x PVIFA (10,10%) – 2,000,000

OCF = 2,000,000/6.144567

        = 325,490.80

Contribution margin per unit = 120 -60 = 60

OCF = (Contribution margin per unit x Q – fixed cost) x (1-t) + depreciation tax shield

325,490.80 = (60 x Q – 211,000) x (1-0.35) + 70,000

39Q -137150=255,490.80

Q = 392,640.80/39

Q = 10067.71

So break even sales would be 10068 diamonds per year.

Related Questions

Navigate

• Browse (All)
• Browse D
• Subjects

---

---

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.