Question

Oscar Inc. has a new product priced at $500 per unit. Variable cost is $250 per unit, and fixed costs are $200,000 per year. Quantity sold is expected to be 20,000 units per year. The new product will require an initial investment of $14 million, depreciation will be straight-line to zero for seven years, and salvage at the end of seven years is expected to be $1 million. Demand for the product is expected to be stable and to continue for seven years. The required rate of return on this new product line is 12%. Ignoring taxes, what is the accounting break-even quantity?

Select one:

a. 800

b. 880

c. 8,000

d. 8,800

e. 88,000

Oscar Inc. has a new product priced at $500 per unit. Variable cost is $250 per unit, and fixed costs are $200,000 per year. Quantity sold is expected to be 20,000 units per year. The new product will require an initial investment of $14 million, depreciation will be straight-line to zero for seven years, and salvage at the end of seven years is expected to be $1 million. Demand for the product is expected to be stable and to continue for seven years. The required rate of return on this new product line is 12%. What is the cash break-even quantity?

Select one:

a. 800

b. 880

c. 8,000

d. 8,800

e. 88,000

Answer 1

ANSWER : d : 8800 UNITS

ACCOUNTING BREAKEVEN POINT IS DEFINED AS = (FIXED COST + DEPRECIATION)/ (SP -VC) PER UNIT

DEPRECIATION = COST/LIFE = 14 MILLION/7 = 2 MILLION = 2000000

ACCOUNTING BREAKEVEN POINT= (200000 + 2000000)/ (500-250) = 8800 UNITS

ANSWER : a : 800 UNITS CASH BREAKEVEN POINT

CASH BREAKEVEN POINT IS DEFINED AS = FIXED COST/ (SP -VC) PER UNIT

(DEPRECIATION IS NON-CASH EXPENDITURE, SO NOT TO BE CONSIDERED)

CAH BREAKEVEN POINT= 200000 / (500-250) = 800 UNITS