Question

· Break-Even Analysis Your buddy comes to you with a sure-fire way to make some quick money and help pay off your student loans. His idea is to sell T-shirts with the words "I get" on them. "You get it?" He says, "You see all those bumper stickers and T-shirts that say 'got milk' or 'got surf.' So this says, 'I get.' It's funny! All we have to do is buy a used silk screen press for $7,200 and we are in business!" Assume there are no fixed costs and you depreciate the $7,200 in the first period. The tax rate is 21 percent. a. What is the accounting break-even point if each shirt costs $3.20 to make and you can sell them for $15 apiece? Now assume one year has passed and you have sold 5,000 shirts! You find out that the Dairy Farmers of America have copyrighted the “got milk” slogan and are requiring you to pay $20,000 to continue operations. You expect this craze will last for another three years and that your discount rate is 12 percent. b. What is the financial break-even point for your enterprise now?

Answer 1

Answer A) Break even sale =( fixed cost+depreciation)*(1-TAX) / (selling price - variable cost) *(1-Tax)

Break even sale = 7200*(1-0.21) /(15-3.20)*(1-0.21) = 610.17 i.e. 611 piece of T shirts

Answer b) Financial Break even point

Financial Breakeven Point EAC+ Fixed Cost (1 - Tax) - Depreciation Tax (Sales Price-Variable Cost)(1-Tax) Initial Investment EAC- Present Value Annuity Factor for Project Period and at Discount Rate

EAC = 20000 / AV 12% for 3 years = 20000 / 2.4018 = 8326.98

as fixed cost , depreciation is zero for operation

Financial Breakeven Point = 8326.98 /(15-3.20)*(1-0.21) = 893.26 i.e 894