Question

Mayborn​ Enterprises, LLC runs a number of sporting goods businesses and is currently analyzing a new​ T-shirt printing business.​ Specifically, the company is evaluating the feasibility of this business based on its estimates of the unit​ sales, price per​ unit, variable cost per​ unit, and fixed costs. The​ company's initial estimates of annual sales and other critical variables are shown​ here:

a. Calculate the accounting and cash​ break-even annual sales volume in units.
b. Bill Mayborn is the grandson of the founder of the company and is currently enrolled in his junior year at the local state university. After reviewing the accounting​ break-even calculation done in part
a​,Bill wondered if the depreciation expense should be included in the calculation. Bill had just completed his first finance class and was well aware that depreciation is not an actual​ out-of-pocket expense but rather an allocation of the cost of the printing equipment used in the business over its useful life. What do you​ think? What can you learn from the cash and accounting​ break-even points?

Base case Unit sales 7,500
Price per unit ​$15.44
Variable cost per unit ​$10.97
Fixed cash expense per year ​$10,100
Depreciation expense ​$4,200

Answer 1

a. Accounting break-even sales volume: 1,676 units

b. Depreciation expense should be included in the calculation. Cash and accounting break-even points provide insights into the business's financial viability and the impact of depreciation on profitability.

a. The accounting break-even sales volume is calculated by dividing the fixed costs by the contribution margin per unit, which is the difference between the price per unit and the variable cost per unit. In this case, the accounting break-even sales volume is 1,676 units.

b. Depreciation expense should be included in the calculation because it represents the allocation of the printing equipment cost over its useful life. Including depreciation in the break-even analysis helps provide a more accurate picture of the business's profitability and the impact of fixed costs on its financial performance. Understanding both the cash and accounting break-even points can help assess the business's financial feasibility and make informed decisions.

Learn more about depreciation expense here: