Question

# 22. A company is considering a 5-year project that opens a new product line and requires...

22.

A company is considering a 5-year project that opens a new product line and requires an initial outlay of \$80,000. The assumed selling price is \$93 per unit, and the variable cost is \$66 per unit. Fixed costs not including depreciation are \$20,000 per year. Assume depreciation is calculated using stright-line down to zero salvage value. If the required rate of return is 10% per year, what is the cash break-even point? (Answer to the nearest whole unit.)

Initial outlay : \$80,000

selling price : \$93 per unit

variable cost : \$66 per unit

Fixed costs without Depreciation :  \$20,000 per year

Rate of return : 10% per year

• Converting Initial investment of \$80,000 as an equivalent annual cost(EAC),

EAC =  Initial Investment / (5 year 10% annuity factor)

EAC = \$80000 / 2.52719

EAC = \$31655.6977

Total fixed cost : \$20000 + \$31655.6977 = \$51655.6977 per year

BEP (units) = Fixed costs/Selling price per unit- variable costs per unit.

BEP (units) = \$51655.6977/(93-66) =1913.1739 = 1914 Units

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