Miniature Molding is planning to introduce a valve for use in medical implants.Variable costs per unit are $250.The maximum price MM could charge is $325.Fixed costs associated with this product are $20,000,000.Depreciation expense of $2,500,000 is included in fixed costs.The worst-case forecast calls for sales of 240,000 valves, the best-case for $290,400.Will MM reach cash break-even in the worst-case scenario?
A)Sales will fall short of cash break-even by $8,666,667.
B)The product will exactly break even.
C)Sales will fall short of cash break-even by $2,000,025.
D)Sales will exceed cash break-even by $2,166,667.

Question

Quizplus · Accepted Answer

To calculate the cash break-even point, we exclude non-cash expenses like depreciation from the fixed costs. So, the cash fixed costs are $20,000,000 - $2,500,000 = $17,500,000. The contribution margin per unit is the selling price minus variable costs, which is $325 - $250 = $75. The number of units needed to break even in cash terms is the cash fixed costs divided by the contribution margin per unit, which is $17,500,000 / $75 = 233,333.33 units. In the worst-case scenario, with sales of 240,000 units, MM will exceed this break-even point, indicating they will exceed cash break-even.

Miniature Molding Is Planning to Introduce a Valve for Use