Question

We are evaluating a project that costs $630,700, has a seven-year life, and has no salvage value. Assume that depreciation is straight-line to zero over the life of the project. Sales are projected at 90,000 units per year. Price per unit is $46, variable cost per unit is $33, and fixed costs are $720,000 per year. The tax rate is 25 percent, and we require a return of 10 percent on this project.
a-1.
Calculate the accounting break-even point. (Do not round intermediate calculations and round your answer to the nearest whole number, e.g., 32.)

a-2. What is the degree of operating leverage at the accounting break-even point? (Do not round intermediate calculations and round your answer to 3 decimal places, e.g., 32.161.)

Answer 1

Answer:

(i) 62,315 units

(ii) 810,101.00

Explanation:

a-1. Depreciation = Project cost ÷ Years of life

                             = $630,700 ÷ 7

                             = $90,100

Therefore,

Accounting break-even point:

$=\frac{Fixed\ cost+Depreciation}{Sales\ price-variable\ cost}$

$=\frac{720,000+90,100}{46-33}$

      = 62,315 units

a-2. Degree of operating leverage at the accounting break-even point:

= 1 + (Fixed cost + Operating cash flow)

= 1 + (720,000 + 90,100)      [∴ Depreciation is the only OCF at this point]

= 1 + 810,100

= 810,101.00