BASIC INFORMATION: A three-year project will cost $60,000 to construct. This will be depreciated straight-line to zero over the three-year life. The price per unit sold is $20 and the variable cost per
Unit sold is $10. Fixed costs are $30,000 per year.
Using the BASIC INFORMATION, compute the cash break-even point. (Ignore taxes.)
A) 1,800
B) 3,000
C) 4,200
D) 5,000
E) 7,000

Question

Quizplus · Accepted Answer

First, we need to calculate the contribution margin per unit:

Contribution Margin = Price per unit – Variable cost per unit
Contribution Margin = $20 – $10
Contribution Margin = $10

Next, we need to calculate the annual fixed costs:

Annual fixed costs = Fixed costs per year x Number of years
Annual fixed costs = $30,000 x 3
Annual fixed costs = $90,000

Now we can calculate the breakeven point in units:

Breakeven in units = (Fixed Costs / Contribution Margin) / Number of years
Breakeven in units = ($90,000 / $10) / 3
Breakeven in units = 3,000

Therefore, the cash break-even point is 3,000 units. Choice B is the best choice as it is the only option that matches the calculated break-even point.

BASIC INFORMATION: a Three-Year Project Will Cost $60,000 to Construct