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 a. Ignoring the effect of taxes, what is the accounting break-even quantity? (Do not round intermediate calculations and round your answer to 2 decimal places, eg.. 32.16.) b. What is the cash break-even quantity? (Do not round intermediate calculations and round your answer to 2 decimal places, e.g. 32.16.) c. What is the financial break-even quantity? (Do not round intermediate calculations and round your answer to 2 decimal places, e.g. 3216.) d. What is the degree of operating leverage at the financial break-even level of output? (Do not round intermediate calculations and round your answer to 3 decimal places, e.g., 32.161.) a. Accounting break-even quantity b. Cash break-even quantity c. Financial break-even quantity d. DOL

Answer 1

Solutions Sales Price per unit - 54 Vericable cost . . - 34 fixed cost = 17,000 $ Depreciation 30000 = 6000 Pes year 5 finance cost oh Reaniled rate Rate x investment 150x 30000 100 = 15x30009 - 4.500 $ per year. Tares - Not applicable Accounting Break Even Buantity Accounting fixed cost contribution per unit fized cost + Derplication (Sales Price - Variable cost) 17000+ Gooo 23000 =1150 units ( 54.34) 20 Cash Breakeven $7000 fiseed cost contribution - 2000 20 per unit = 850 units Dividends - Preferred Financid Breakeren - Pereterred Dividends tinterest Expense cintad rate Corfinance cost) as there is no Preferred dividend hence Financial Breakeven = finance cost = 4500 continued

(2) Per unit financial Breake financial Breakeren Amout = het contribution per unit a financial Breakeven contribution per unit - fized cost per unit 4500 (54-347- บ เ% นรF3 Lets say x is the quantity doo Breakeren so - 4500 2120- 23000 =4500 2 - for tinancial 0- 20 - 23000 ze Salining one canection for t o ( 202- 23000 ) = 4500 => 202- 23000 =4500 => 202 - 27500 > x=1375 units operating leverage Degree of operating leverage = as CP-v) or AOL OCP-V) - F 1375 ( 54-34) [{1375C 54-36} - <\7000 +6000) 5 (54-34) 1375 x 20 [C1315 *20) - 23000) i (1375X20) - 23000] DOL F51375654-34)} - 27,500 - 27500-23000 = 27,500 4,500 - Gill 611 *. = 6.11