A project has the following estimated data: price = $52 per unit; variable costs

Question

A project has the following estimated data: price = $52 per unit; variable costs = $34 per unit; fixed costs = $23,500; required return = 12 percent; initial investment = $30,000; life = three 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.)   Break-even quantity    What is the cash break-even quantity? (Do not round intermediate calculations. Round your answer to 2 decimal places, e.g., 32.16.)      Break-even quantity    What is the financial break-even quantity? (Do not round intermediate calculations. Round your answer to 2 decimal places, e.g., 32.16.)      Break-even quantity    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.)      DOL

Explanation / Answer

Accounting Break even quantity: (Fixed cost + Initial Investment / no. of years)/ (Sales per unit – Variable cost per unit)

                           = ($23,500 + $30,000/3) / ($52 - $34) = 1861.11

Cash break-even quantity: (Fixed cost ) / (Sales per unit – Variable cost per unit)

                              = ($23,500) / ($52-$34) = 1305.56

Financial break-even quantity:

Operating cash flow: Initial Investment / 3 year annuity factor at 12%

                                 = $30,000 / 2.40183 = $12490.48

Financial break-even quantity = (Fixed cost + Operating cash flow) / (Price per unit - Variable cost per unit) = (23,500 + 12490.48)/ (52 - 34) = 1999.47

The DOL of the project is:

DOL = 1 + ( $23,500/ $12490.48) = 1 + 1.881 = 2.881

Related Questions

Navigate

• Browse (All)
• Browse A
• Subjects

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