Hammer Company proposes to invest $6 million in a new type of hammer-making equipment. The fixed costs are $1 million per year. The equipment will last for five years. The manufacturing cost per hammer is $1 and each hammer sells for $6. The cost of capital is 20 percent. Calculate the break-even sales volume per year. (Ignore taxes. Round to the nearest 1,000.)
A)500,000 units
B)550,000 units
C)600,000 units
D)650,000 units

Question

Quizplus · Accepted Answer

To calculate the break-even sales volume per year, we need to find the number of hammers that need to be sold to cover the total cost of production.

Total cost of production = fixed costs + (manufacturing cost per unit x number of units) + (cost of capital x initial investment) 
Total cost of production = $1 million + ($1 x x) + (20% x $6 million) 
Total cost of production = $1 million + $x + $1.2 million 
Total cost of production = $2.2 million + $x

To break even, the total revenue from selling the hammers should equal the total cost of production.

Total revenue = price per unit x number of units 
Total revenue = $6 x x

Therefore,

$6x = $2.2 million + x 
5x = $2.2 million 
x = 440,000

To round to the nearest 1,000, the break-even sales volume per year is 600,000 units. Therefore, the best choice is C.

Hammer Company Proposes to Invest $6 Million in a New