Question

A project has the following estimated data: price = $52 per unit; variable costs = $33 per unit; fixed costs = $15,500; required return = 12 percent; initial investment = $32,000; life = four years.

Ignoring the effect of taxes, what is the accounting break-even
quantity? |

Break-even quantity |

What is the cash
break-even quantity? (Do not round intermediate
calculations. Round your answer to 2 decimal places, e.g.,
32.16.) |

Break-even quantity |

What is the financial break-even quantity? |

Break-even quantity |

What is the degree of operating leverage at the financial
break-even level of output? |

DOL |

Answer #1

a) Accounting break-even point = (FC + Depreciation) / (Price - VC)

FC - Fixed Cost = 15,500, Depreciation = 32,000/4 = 8,000, Price = 52, VC = 33

=> BEP = (15,500 + 8,000) / (52 - 33) = 1,236.84

b) Cash break-even point = FC / (Price - VC) = 15,500 / (52 - 33) = 815.79

c) Financial Break-even is when NPV = 0

NPV = - Investment + PV of CF = -32,000 + OCF x PVIFA (12%, 4) = 0

=> OCF = 32,000 / 3.037 = $10,535.50

=> BEP x (52 - 33) - 15,500 = 10,535.50

=> BEP = 1,370.29

d) DOL = 1 + FC / OCF = 1 + 15,500 / 10,535.50 = 2.471

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