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 are 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

Cash break-even does not consider depreciation as it is a non-cash expense. Therefore, the relevant fixed costs are $20,000,000 - $2,500,000 = $17,500,000. The contribution margin per unit is $325 - $250 = $75. The number of units needed to break even in cash terms is $17,500,000 / $75 = 233,333 units. With a worst-case sales forecast of 240,000 units, MM will exceed the cash break-even point, selling 6,667 units more than needed. The excess cash generated is 6,667 units * $75 = $500,025. However, the correct calculation for the excess cash should consider the total revenue and total variable costs, not just the excess units.

Miniature Molding Is Planning to Introduce a Valve for Use