Question

We are evaluating a project that costs $837,708, has an eight-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 59,597 units per year. Price per unit is $38, variable cost per unit is $22, and fixed costs are $423 per year. The tax rate is 35%, and we require a return of 18% on this project. Calculate the Accounting Break-Even Point. (Round answer to 0 decimal places. Do not round intermediate calculations)

Answer 1

The Accounting Break-Even Point is calculated using the formula: (Total Fixed Costs + Depreciation) / (Price per unit - Variable Cost per unit). For the given project, this results in 6571 units.

Step-by-step explanation:

To calculate the Accounting Break-Even Point, we need to determine the level of sales that will result in zero net income. This occurs when total revenue equals total expenses, which include both fixed and variable costs, as well as depreciation.

The formula to calculate the Accounting Break-Even Point in units is:

Total Fixed Costs + Depreciation / (Price per unit - Variable Cost per unit) = Break-Even in Units

The total fixed costs are given as $423 per year. Since there is no salvage value for the project and it has a life of 8 years, the depreciation expense is the initial project cost divided by its life span, which is $837,708 / 8. Therefore, the annual depreciation is $104,713.5. The price per unit is $38 and the variable cost per unit is $22.

So, the calculation is:

($423 + $104,713.5) / ($38 - $22) = $105,136.5 / $16 = 6571 units (rounded to the nearest whole number)

The Accounting Break-Even Point is 6571 units.