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 19,500 units.

Machine cost: $200,000

Economic life: 5 years

Annual Depreciation = Machine Cost / Economic Life

Annual Depreciation = $200,000 / 5 = $40,000 per year

Variable Costs:

Variable Cost per Toy = $5

Fixed Costs:

Fixed Costs per Year = $350,000

Break even point will be

= (350000 + 40000) / (25 - 5)

= 19500

So, the break-even point for the project is 19,500 units. This is the level of production at which the total revenue equals total costs, resulting in neither profit nor loss.