Question

BK Toys just bought a $200,000 machine to produce toy cars. The machine will be fully depreciated by the straight-line method over its 5-year economic life. Each toy sells for $25. The variable cost per toy is $5, and the firm incurs fixed costs of $350,000 each year. You estimate the demand in the first year to 20,000 units and expect 10% growth per year for the life of the project. If the corporate tax rate is 25% and the discount rate is 8%, what is the break-even point for the project?

Answer 1

The break-even point for the project is 17,500 units of toy cars.

Step-by-step explanation:

To calculate the break-even point for the project, we need to find the quantity at which the total revenue equals the total cost. The total cost includes both the fixed costs and the variable costs per unit of the toy cars produced. The total cost per unit can be calculated by dividing the total cost by the quantity of toy cars produced. The break-even quantity can be calculated by dividing the fixed costs by the difference between the selling price per unit and the variable cost per unit.

In this case, the fixed costs are $350,000 and the difference between the selling price per unit ($25) and the variable cost per unit ($5) is $20. Therefore, the break-even quantity can be calculated as follows:

Break-even quantity = Fixed costs / (Selling price per unit - Variable cost per unit)

Break-even quantity = $350,000 / $20 = 17500 units