What is the degree of operating leverage at the accounting break-even point? (Do
ID: 2797514 • Letter: W
Question
What is the degree of operating leverage at the accounting break-even point? (Do not round intermediate calculations. Round your answer to 3 decimal places, e.g., 32.161.)
What is the degree of operating leverage at the accounting break-even point? (Do not round intermediate calculations. Round your answer to 3 decimal places, e.g., 32.161.)
You are considering a new product launch. The project will cost $2,050,000, have a four-year life, and have no salvage value; depreciation is straight-line to zero. Sales are projected at 170 units per year; price per unit will be $26,000, variable cost per unit will be $16,000, and fixed costs will be $560,000 per year. The required return on the project is 15 percent, and the relevant tax rate is 30 percent a. Based on your experience, you think the unit sales, variable cost, and fixed cost projections given here are probably accurate to within ±10 percent. What are the upper and lower bounds for these projections? What is the base-case NPV? What are the best-case and worst-case scenarios? (Negative amounts should be indicated by a minus sign. Do not round intermediate calculations. Round your NPV answers to 2 decimal places, e.g., 32.16. Round your other answers to the nearest whole number, e.g. 32.) Unit Sales Scenario Base Best Worst Variable Cost Fixed Costs NPV 170 187 153 $16000 14400 17600 $ 560000 504000 616000 $667246.2Explanation / Answer
Statement showing NPV
Statement showing Best case NPV
Statement showing worst case NPV
Accounting break even = Fixed cost/contribution per unit
=(560000+512500)/26000-16000
1072500/10000
=107.25 i.e 108 units
DOL at accounting breakeven
=Contribution margin/net income
Total contribution/PBIT
=1080000/560000
=1.928
Particulars 1 2 3 4 Total Sales perice per unit 26000 26000 26000 26000 Variable cost per unit 16000 16000 16000 16000 Contribution per unit 10000 10000 10000 10000 Units 170 170 170 170 Total contribution 1700000 1700000 1700000 1700000 Less: Fixed cost 560000 560000 560000 560000 Depreciation(2050000/4) 512500 512500 512500 512500 PBT 627500 627500 627500 627500 Tax @ 30% 188250 188250 188250 188250 PAT 439250 439250 439250 439250 Add: depreciation 512500 512500 512500 512500 Annual cash flow 951750 951750 951750 951750 PVIF @ 15% 0.870 0.756 0.658 0.572 PV 827609 719660 625791 544166 2717226 Less: initial cost 2050000 NPV 667226Related Questions
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