Question

Ayden's Toys, Inc., just purchased a $480,000 machine to produce toy cars. The machine will be fully depreciated by the straight-line method over its seven-year economic life. Each toy sells for $20. The variable cost per toy is $7, and the firm incurs fixed costs of $340,000 each year. The corporate tax rate for the company is 24 percent. The appropriate discount rate is 12 percent. What is the financial break-even point for the project in units?

Answer 1

Answer : 38465 units

Calculation :

To calculate financial breakeven point, we express the initial investment as equivalent annual cost (EAC). Dividing the initial investment by the seven-year annuity factor, discounted at 12 percent, the EAC of the initial investment is

EAC = 480000 / 4.56375653879

EAC = 105176.51

Annual depreciation = $480,000 / 7

Annual depreciation = $68571.43

The financial breakeven point for this is :

Financial breakeven = [EAC + Fixed Cost(1-tax rate) + Depreciation(tax rate) ] / [ (Sales - VC) * (1- tax rate) ]

Financial Breakeven = [ 105176.51 + 340000(1-0.24) + 68571.43(0.24) ] / [ (20-7) * ( 1-0.24) ]

Financial Breakeven = [ 380033.65 ] / 9.88

Financial Breakeven = 38464.94 units or 38465 units