Question

Brutech Corporation is considering whether or not to launch its new product, a kioskfor checking in medical patients at doctor’s offices. Marketing research is confidentthe kioskwill sell 1,300units per year, but the finance department is also evaluating the risks that unit sales and other key forecast variables might pose if the initial data differs from reality.

In the Base Case, the selling price on the 1,300 units will be $2,100 per kiosk. Variable costsper unitwill be $1,300, and fixed costs will be $200,000 per year. The company pays a tax rate of 34%. The total investment needed to undertake the projectis $2,500,000. This amount (I) will be depreciated straight-line to zero over the five-year life of the equipment. The salvage value is zero, and there are no working capital consequences. Brutechhas a 25percent required return on new projects.

Theproject has a zero NPV when the present value of the operating cash flows equals the $2,500,000 investment. Because the cash flow is the same each year, we can solve for the unknown amount by viewing it as an ordinary annuity. Sincethe formula for calculating PVIFAr,Nis [1-(1+r)-N]/r, the PVIFA25%,5= [1-(1.25)-5]/0.25= (1-.326780) / 0.25 = .672320 / 0.25 = 2.6893TheOCF* can /be determined as follows:OCF*= $2,500,000/2.6893

                            Lower Bound                     Upper Bound

Unit Sales                  1,200                                 1,400

Sales price per unit       $1,800                          $2,400

Variable cost per unit     $1,100                        $1,500

Fixed Costs                 $150,000                      $250,000

1-What is the Cash Breakeven (QC) point?

2-What is the Accounting Breakeven (QA) point?

3-What is the Financial Breakeven (QF) point?

Answer 1

Lower bound: Unit sale price*unit sales

= $1800*1200

=$21,60,000

Variable cost: Variable cost per unit*unit sales

=$1100*1200

=$13,20,000

Contribution:Sales- variable cost  

=$21,60000-$13,20,000

=$8,40,000

Contribution margin per unit= Contribution/sales unit

=$8,40,000/1200

=$700

cash break even point for Lower bound= fixed cost- depreciation/contribution per unit

=$150000/700

=$214.85

Upper bound: Unit sale price*unit sales   

=$2400*1400

=$33,60,000

Variable cost: Variable cost per unit*unit sales

=$1500*1400

=$21,00,000

Contribution: Sales- variable cost

=$33,60,000-21,00,000

=$12,60,000

Contribution margin per unit= Contribution/sales unit

=$12,60,000/1400

=$900

cash break even point for upper bound= fixed cost- depreciation/contribution per unit

$2,50,000/$900

=$277.77

Accounting breakeven point= sales -variablecost -fixed cost=0