Question

A project has the following estimated data: price = $80 per unit; variable costs = $46.4 per unit; fixed costs = $6,100; required return = 12 percent; initial investment = $8,000; life = three years. Ignore the effect of taxes.

  

Required:

(a)	What is the accounting break-even quantity? (Do not round your intermediate calculations.)
	(Click to select)182 261 287 313 248

  

(b)	What is the cash break-even quantity? (Do not round your intermediate calculations.)
	(Click to select)164 173 146 182 261

  

(c)	What is the financial break-even quantity? (Do not round your intermediate calculations.)
	(Click to select)281 337 225 253 309

  

(d)	What is the degree of operating leverage at the financial break-even level of output? (Do not round your intermediate calculations.)
	(Click to select)1.3141 2.8314 2.0098 1.0822 1.7779

rev: 09_18_2012

Answer 1

a. Accounting breakeven quantity = Fixed cost + depreciation / (price per unit - variable cost per unit)

= [$6100 + ($8000 / 3 years)] / ($80 - $46.4)

= $8767 / $33.6

= 261 units

b. Cash breakeven quantity = Fixed cost / (price per unit - variable cost per unit)

= $6100 / $33.6

= 182 units.

c. Financial breakeven quantity :

$8000 = OCF (PV of annuity of 12% for 3 years)

$8000 = OCF * 2.40183

OCF = $3330.79

Financial breakeven quantity = ($6100 + $3330.79) / $33.6

= 281 units.

Degree of operating leverage = 1 + (Fixed cost / operating cash flows)

= 1 + ($6100 / $3330.79)

= 1 + 1.8314

= 2.8314.