Question

the quorum company has a prospective 6 year project that requires initial fixed assets of $963,000, annual fixed $403,400, variable costs $123.60 per unit, sales price of $249, discount rate 14%, tax rate 21%. asset straight line depreciated to zero over life of project.

compute accounting break even sales

compute financial break even quantity

Answer #1

Annual depreciation = $ 963,000 / 6 = $ 160,500

Total fixed costs = $ ( 403,400 + 160,500) = $ 563,900

Contribution margin per unit = $ ( 249 - 123.60) = $ 125.40

**Accounting break even quantity = $ 563,900 / $ 125.40 =
4,496.81 units**

Let the financial break-even quantity be Q.

Annual operating cash flows after taxes = EBITDA x ( 1 - t ) + Depreciation x t = ( 125.40Q - 403,400 ) x 0.79 + $ 160,500 x 0.21= 99.066 Q - 318,686 + 33,705 = 99.066 Q - 284,981

PVIFA _{14%, n=6} = [ { 1 - ( 1 / 1.14 ) ^{6} }
/ 0.14 ] = 3.88867

At financial break even, NPV = 0

or ( 99.066 Q - 284,981) x 3.88867 - 963,000 = 0

or 385.2349Q - 1,108,197.07 = 963,000

or Q = 5,376.45 units

**Therefore, financial break even quantity is 5,376.45
units**

the quorum company has a prospective 6 year project that
requires initial fixed assets costing $963,000, annual fixed costs
of $403,400, variable costs per unit of $123.60, a sales price per
unit of $249, a discount rate of 14 percent, and a tax rate of 21
percent. the asset will be depreciated straight-line to zero over
the life of the project.
compute the financial break-even sales quantity

the quorum company has a prospective 6 year project that
requires initial fixed assets costing $963,000, annual fixed costs
of $403,400, variable costs per unit of $123.60, a sales price per
unit of $249, a discount rate of 14 percent, and a tax rate of 21
percent. the asset will be depreciated straight-line to zero over
the life of the project.
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