Question

Ayden's toys, incorporated, just purchased a $490,000 machine to produce toy cars. the machine will be fully depreciated by the straight-line method over its 7-year economic life. each toy sells for $22. the variable cost per toy is $7 and the firm incurs fixed costs of $350,000 per year. the corporate tax rate for the company is 21 percent. the appropriate discount rate is 9 percent. what is the financial break-even point for the project?

Answer 1

The financial break-even point for Ayden's Toys, Incorporated project is the sale of 28,000 toy cars.

Step-by-step explanation:

To find the financial break-even point for Ayden's Toys, Incorporated, we need to calculate the point at which the company's total costs equal its total revenues, not considering taxes, as breakeven analysis assumes no profit (which would be taxed).

The machine depreciates at a rate of $490,000 / 7 years = $70,000 per year. Including other fixed costs, the total fixed costs amount to $350,000 + $70,000 = $420,000 annually. Each toy has a variable cost of $7, and sells for $22, which gives a contribution margin of $22 - $7 = $15 per toy.

To break even, Ayden's Toys needs to cover its fixed costs with the contribution margin it earns from each toy. Therefore, the break-even quantity (Q) can be found by dividing the total fixed costs by the contribution margin per toy: Q = $420,000 / $15 = 28,000 toys.