Question

A project has the following estimated data: Price = $48 per unit; variable costs = $32 per unit; fixed costs = $20,500; required return = 8 percent; initial investment = $36,000; life = six years. a. Ignoring the effect of taxes, what is the accounting break-even quantity? (Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.) b. What is the cash break-even quantity? (Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.) c. What is the financial break-even quantity? (Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.) d. What is the degree of operating leverage at the financial break-even level of output? (Do not round intermediate calculations and round your answer to 3 decimal places, e.g., 32.161.)

Answer 1

Accounting break even point	(fixed cost+depreciation)/contribution margin per unit	(20500+6000)/(48-32)	1656.25
cash break even quantity	(total fixed cost-depreciation)/contribution margin per unit	(20500-6000)/(48-32)	906.25
Depreciation using straight line method = cost of machine/life of machine	36000/6		6000
financial break even point = (fixed cost+depreciation+return)/(contribution per unit)	(20500+6000+2880)/(48-32)		1836.25
return = initial investment*rate of return		36000*8%	2880
sales	financial break even units*selling price	1836.25*48	88140
variable cost	financial break even units*variable cost per unit	1836.25*32	58760
contribution			29380
less total fixed cost			26500
EBIT			2880
degree of operating leverage = contribution /ebit	29380/2880		10.201