Question

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.)

Answer 1

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