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**

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