Question

We are evaluating a project that costs $714,400, has an eight-year life, and has no salvage value. Assume that depreciation is straight-line to zero over the life of the project. Sales are projected at 90,000 units per year. Price per unit is $51, variable cost per unit is $36, and fixed costs are $745,000 per year. The tax rate is 25 percent, and we require a return of 11 percent on this project. a-1. Calculate the accounting break-even point. (Do not round intermediate calculations and round your answer to the nearest whole number, e.g., 32.) a-2. What is the degree of operating leverage at the accounting break-even point

Answer 1

a-1. 55,620 units

a-2. 9.34

Step-by-step explanation:

a-1. The accounting break-even point is calculated by;

= (Fixed costs + Depreciation) / (Sales - Variable costs)

Depreciation = 714,400/8 = $89,300

Accounting breakeven = (745,000 + 89,300) / (51 - 36)

= 55,620 units

a-2. Degree of Operating Leverage

= 1 + (Fixed Costs/ Operating Cashflow)

= 1 + (745,000 / 89,300)

= 9.34

At this point, the only given Operating cashflow figure is Depreciation.