Question

Crane’s Candles will be producing a new line of dripless candles in the coming years and has the choice of producing the candles in a large factory with a small number of workers or a small factory with a large number of workers. Each candle will be sold for $10. If the large factory is chosen, the cost per unit to produce each candle will be $3.60. The cost per unit will be $7.60 in the small factory. The large factory would have fixed cash costs of $2.20 million and a depreciation expense of $300,000 per year, while those expenses would be $480,000 and $100,000, respectively, in the small factory. Calculate the pretax operating cash flow break-even point for both factory choices for Crane’s Candles. (Round answers to nearest whole units e.g. 152.)

The pretax operating cash flow breakeven point for the large factory is _units and for the small factory is _

Answer 1

IF ANY QUERY, FEEL FREE TO ASK Solution We know that Cash Break Even point = Fixed Cost Unit Price - Unit Variable Cost Hence, Using above formula we get Cash Break Even point Large Factory= 2200000 = 343750 units - 2200000 10-3.6 6.4 22000 - 22000 - 2200000 - 343750 units 916667 units Cash Break Even point Small Factory= 916667 units 480000 10-7.6 2200000 = 2.4 Hence, The pretax operating cash flow breakeven point for the large factory is 343750 units and for the small factory is 916667 units.

Answer 2

Cash flow break even point = Total cash fixed costs/(Selling price per unit – Variable cost per unit)

Large Factory = (2,300,000)/(10-3.50)

= 353,846 units

Small Factory = (440,000)/(10-6.40)

= 122,222 units