Question

Problem 11-5 Sensitivity Analysis and Break-Even [LO1, 3] 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

a-1. $1,845,714.29

a-2 8.2805

Step-by-step explanation:

a-1 Calculate the accounting break even point.

At break even point, the net income is 0.

Given the data below as extracted from the information above;

Quantity Q = 80,000 units

Price per unit P = $38

Unit variable cost VC = $24

Fixed costs FC = $680,000

Tax rate = 22%

• Break even point

= Fixed costs / P - VC

= $680,000 / ($38 - $24)

= $680,000 / $14

= 48,571.43

Therefore, accounting break even

= Q × P

= 48,571.43 × $38

= $1,845,714.29

(a-2) What is the degree of operating leverage at the accounting break even point.

Given that;

Fixed costs = $680,00

Asset investment = $560,400

Project life span = 6 years

Depreciation = Asset investment / Project life span

= $560,00 / 6

= $93,400

Please note that at accounting level, the operating cash flow is equal to depreciation,

Operating cash flow = Depreciation = $93,400

Therefore, the degree of operating leverage is;

= 1 + Fixed costs / Operating cash flow

= 1 + $680,000 / $93,400

= 8.2805