Question

The Covington Engine Company is considering opening a new plant facility to build truck engines. As part of a detailed analysis of the proposed facility, Covington’s management wants some information on the cash breakeven point. Fixed costs for the facility are expected to be $6 million a year, including depreciation expenses of $800,000 a year. The engines’ sales price is expected to be $7,000 per unit, and the variable cost is expected to be $3,000 per unit. Calculate the expected annual cash breakeven point and the expected annual cash breakeven sales.

Answer 1

Cash breakeven point = (Fixed Assets - Depreciation) / Contribution Margin

Contribution Margin = Sales Price - Variable Cost

Cash Breakeven point

= ( 6,000,000 - 800,000) / ( 7,000 - 4,000)

= 1,300 units

Expected Annual Breakeven sales

= Cash breakeven point * Sales price

= 1,300 units * 7,000

= $9,100,000