Question

We are evaluating a project that costs $560,400, has a six-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 80,000 units per year. Price per unit is $38, variable cost per unit is $24, and fixed costs are $680,000 per year. The tax rate is 22 percent, and we require a return of 10 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

Answer:

a -1.  48,572 units

a -2  2.56

Explanation:

Break even point is the level of activity where a firm neither makes a profit or loss.

Break Even point (units) = Fixed Costs ÷ Contribution per unit

Where,

Contribution per unit = Sales per unit - Variable Cost per unit

                                   = $38 - $24

                                   = $14

Therefore,

Break Even point (units) = $680,000 ÷ $14

                                        = 48,572 units

Degree of operating leverage = Contribution ÷ Earnings Before Interest and Tax

                                                  = 80,000 units × $14 ÷ (80,000 units × $14 - $680,000)

                                                  = $1,120,000 ÷ $440,000

                                                  = 2.56