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Consider a project with the following data: accounting break-even quantity = 24,240 units; cash break-even quantity...

Consider a project with the following data: accounting break-even quantity = 24,240 units; cash break-even quantity = 16,000 units; life = three years; fixed costs = $160,000; variable costs = $60 per unit; required return = 15 percent. Ignoring the effect of taxes, find the financial break-even quantity.

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Answer #1

Contribution per unit = Fixed Costs/Cash Break Even = $160000/16000 units = $10/unit

Selling Price per unit = Contribution per unit + Variable Cost per unit = 10+60 = $70/unit

Depreciation = (Accounting Break Even - Cash Break Even)*Contribution per unit = (24240-16000)*10 = $82400

Assuming, SLM & No Salvage Value, Project Cost i.e. Initial Invesment = Depreciation*Useful Life = 82400*3 = $247200

Required Return = Initial Investment*Required Rate of Return = 247200*15% = $37080

Above Required Return is Desired Profit.

Therefore, Financial Break Even = (Desired Profit+Fixed Cost)/Contribution per unit = (37080+160000)/10 = 19708 units

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