Final answer:
The Accounting Break-even point for Toys, Incorporated is 19,722 units, calculated by dividing the fixed costs by the difference between price per unit and variable cost per unit. The Cash Flow Break-even point is 23,651 units, which is calculated by adding depreciation back to the fixed costs and then dividing by the same difference.
Step-by-step explanation:
Accounting Break-Even Point and Cash Flow Break-Even Point
To calculate the Accounting Break-even point, you should know that it is the point at which total revenues equal total accounting costs. It can be calculated by dividing total fixed costs by the price per unit minus variable cost per unit. For Toys, Incorporated:
Accounting Break-even = Total Fixed Costs / (Price per Unit - Variable Cost per Unit)
Accounting Break-even = $355,000 / ($23 - $5)
Accounting Break-even = $355,000 / $18
Accounting Break-even = 19,722 units (rounded to the nearest whole unit)
To calculate the Cash Flow Break-even point, we need to determine the amount of units needed to cover all cash costs, including fixed costs and depreciation (but excluding non-cash costs such as depreciation for the purpose of this calculation).
Depreciation = Purchase Price of Machine / Life of Machine
Depreciation = $495,000 / 7
Depreciation = $70,714 per year (using straight-line method)
Since depreciation is a non-cash charge, we add it back to fixed costs to find total cash costs:
Total Cash Costs = Total Fixed Costs + Depreciation
Total Cash Costs = $355,000 + $70,714
Total Cash Costs = $425,714
Cash Flow Break-even = Total Cash Costs / (Price Per Unit - Variable Cost per Unit)
Cash Flow Break-even = $425,714 / ($23 - $5)
Cash Flow Break-even = $425,714 / $18
Cash Flow Break-even = 23,651 units (rounded to the nearest whole unit)