Question

​(Using break-even​ analysis) Mayborn​ Enterprises, LLC runs a number of sporting goods businesses and is currently analyzing a new​ T-shirt printing business.​ Specifically, the company is evaluating the feasibility of this business based on its estimates of the unit​ sales, price per​ unit, variable cost per​ unit, and fixed costs. The​ company's initial estimates of annual sales and other critical variables are shown​ here:

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a. Calculate the accounting and cash​ break-even annual sales volume in units.

b. Bill Mayborn is the grandson of the founder of the company and is currently enrolled in his junior year at the local state university. After reviewing the accounting​ break-even calculation done in part

a​,

Bill wondered if the depreciation expense should be included in the calculation. Bill had just completed his first finance class and was well aware that depreciation is not an actual​ out-of-pocket expense but rather an allocation of the cost of the printing equipment used in the business over its useful life. What do you​ think? What can you learn from the cash and accounting​ break-even points?

a. The accounting​ break-even units of production is

nothing

units

TABLE:

Base Case
Unit sales	7 comma 7007,700
Price per unit	​$16.6316.63
Variable cost per unit	​$9.499.49
Fixed cash expense per year	​$9 comma 7009,700
Depreciation expense	​$3 comma 7003,700

Answer 1

Price 16.63

Variable cost 9.49

Contribution per unit 7.14

Cash expense 9700

Depreciation expense 3700

Total accounting expense 13400

a) Accounting breakeven 1876.75

Cash break even 1358.54

b) Bill is right. For calculating breakeven, cash expense only should be considered

Cash breakeven is lower than accounting breakeven and thus shows greater feasibility of project