Question

Assume a project has projected annual depreciation of $878, annual fixed costs of $3,200, and a variable cost per unit of $5.61. The sales price per unit is expected to be $13.39. What is the accounting break-even level of production?

Answer 1

To calculate the accounting break-even level of production, subtract the sales price per unit from the variable cost per unit to find the contribution margin per unit. Then, divide the annual fixed costs by the contribution margin per unit to get the accounting break-even level of production. In this case, the accounting break-even level of production is approximately 571.14 units.

Step-by-step explanation:

To calculate the accounting break-even level of production, we need to find the quantity at which the total revenue equals the total cost. The total cost is the sum of fixed costs and variable costs. First, let's calculate the variable cost per unit by subtracting the sales price per unit from the variable cost per unit: Variable cost per unit = $13.39 - $5.61 = $7.78.

Next, we can calculate the accounting break-even level of production by dividing the annual fixed costs by the contribution margin per unit. The contribution margin per unit is the sales price per unit minus the variable cost per unit: Contribution margin per unit = $13.39 - $7.78 = $5.61.

Now, we can calculate the accounting break-even level of production: Accounting break-even level of production = Annual fixed costs / Contribution margin per unit. Accounting break-even level of production = $3,200 / $5.61 = approximately 571.14 units.

Answer 2

To calculate the accounting break-even level of production, the fixed costs minus depreciation are divided by the contribution margin per unit. The break-even volume for this project is 299 units since fractional units cannot be sold.

Step-by-step explanation:

To calculate the accounting break-even level of production, we need to determine the number of units that must be sold to cover all costs including depreciation, which is a non-cash expense that reduces reported earnings. The formula to find the accounting break-even point is:
Total Fixed Costs − Annual Depreciation + (Variable Cost per Unit × Number of Units) = Sales Price per Unit × Number of Units.

Given the fixed costs of $3,200 and annual depreciation of $878, we subtract depreciation from fixed costs to get $2,322. As the sales price per unit is $13.39 and the variable cost per unit is $5.61, the contribution margin per unit is $13.39 - $5.61 = $7.78. Therefore, the break-even volume can be calculated by dividing the adjusted fixed costs by the contribution margin:

Accounting Break-Even Volume = $2,322 / $7.78 = 298.46 units.

Since it's not possible to sell a fraction of a unit, the company must sell at least 299 units to break even on an accounting basis.