Modern Artifacts can produce keepsakes that will be sold for $50 each. Nondeprec
ID: 2791767 • Letter: M
Question
Modern Artifacts can produce keepsakes that will be sold for $50 each. Nondepreciation fixed costs are $1,500 per year, and variable costs are $30 per unit. The initial investment of $2,000 will be depreciated straight-line over its useful life of 5 years to a final value of zero, and the discount rate is 10%. a. What is the accounting break-even level of sales if the firm pays no taxes? (Do not round intermediate calculations. Round your answer to the nearest whole number.) b. What is the NPV break-even level of sales if the firm pays no taxes? (Do not round intermediate calculations. Round your answer to the nearest whole number.) c. What is the accounting break-even level of sales if the firm’s tax rate is 40%? (Do not round intermediate calculations. Round your answer to the nearest whole number.) d. What is the NPV break-even level of sales if the firm’s tax rate is 40%? (Do not round intermediate calculations. Round your answer to the nearest whole number.)
Explanation / Answer
a.) Contribution Margin per unit =$50 - 30 =$20
Annual Depriciation =$2000/5 =$400
Fixed Costs Per Year =$1,500
Accounting BreakEven Sales = (Fixed Cost - Depreciation)/Contribution Margin =(1500 - 400)/20 =55 units
b.) Let n be the number of units sold for NPV breakeven point
Cash Flow Each Year = -1500 + 20N (No depreciation tax shield benefit in absence of taxes)
(20N -1500) x {(1-(1+0.10)-5)/0.10} = 0
(20N -1500) x 3.7908 =0
20N =1500
N = 75 units
c.) Accounting breakeven will remain the same as Income Taxes do not have any impact on the fixed costs or the contribution margin realised from the sale of each unit.
d.) Let n be the number of units sold for NPV breakeven point
Initial Investment =$2000
Annual Depriciation =$2000/5 =$400
Cash Flow Each Year = -1500 + 20N + 400x0.40 (Depriciation tax shield benefit improves annual cash flow)
(20N -1500 + 160) x {(1-(1+0.10)-5)/0.10} = 0
(20N -1340) x 3.7908 =0
20N =1340
N = 67 units
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