Question

James, Inc., has purchased a brand new machine to produce its High Flight line of shoes. The machine has an economic life of 6 years. The depreciation schedule for the machine is straight-line with no salvage value. The machine costs $594,000. The sales price per pair of shoes is $87, while the variable cost is $37. Fixed costs of $295,000 per year are attributed to the machine. The corporate tax rate is 22 percent and the appropriate discount rate is 10 percent.

What is the financial break-even point?

Answer 1

James, Inc.

The financial break-even point in:

Sales unit = 8,322

Sales dollars = $724,014

Step-by-step explanation:

a) Data and Calculations:

Cost of machine purchased = $594,000

Estimated economic life = 6 years

Salvage value = $0

Sales price per pair of shoes = $87

Variable cost per pair of shoes = 37

Contribution margin per pair = $50

Discounted contribution = $50 * 0.909 = $45.45

After-tax contribution = $35.45 ($45.45 * 0.78)

After-tax contribution margin ratio = $35.45/$87 * 100 = 41%

Fixed cost per year = $295,000

Corporate tax rate = 22%

Discount rate = 10%

Break-even point = Fixed cost/After-tax contribution

= $295,000/$35.45

= 8,322 units

= $724,014 ($87 * 8,322)