Question

If I am doing a breakeven analysis question for a year 3 project, if the company has agreed to pay 22,500 for a three-year lease before operations start, is this included as a fixed cost and if so how much per year?

Answer 1

In break even analysis we are try to find out how much sales is required to recover all the expenses for the business. All expenses is includes variable cost as well as fixed cost.

Although company has agreed to pay 22,500 for a three-year lease before operations start, it is part of fixed cost as we have to recover this amount from the contribution margin. If we ignore this we will incur losses as breakeven we get by ignoring this amount will not recover lease rent cost.

hence we have to include this as a fixed cost.

Amount Per Year = Total Lease Payment / Years in lease

= $22,500 / 3

= $7,500

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