A project has a five-year life, a 13% required rate of return, and an initial investment in fixed assets of $248,000. The fixed assets will be depreciated straight-line to zero over the life of the project and have no salvage value. Annual fixed costs are estimated at $96,133 while variable costs are projected at $8.06 a unit. The company plans to sell the units for $12.13 each. What is the cash break-even quantity?
A) 7,925
B) 11,927
C) 23,620
D) 28,634
E) 35,807

Question

Quizplus · Accepted Answer

The cash break-even quantity is calculated by dividing the total fixed costs by the contribution margin per unit. The contribution margin per unit is the selling price per unit minus the variable cost per unit. In this case, the selling price per unit is $12.13, and the variable cost per unit is $8.06, so the contribution margin per unit is $12.13 - $8.06 = $4.07. The total fixed costs include both the annual fixed costs and the annual depreciation expense. The annual depreciation expense is the initial investment in fixed assets divided by the life of the project, which is $248,000 / 5 = $49,600. Therefore, the total fixed costs are $96,133 (annual fixed costs) + $49,600 (annual depreciation expense) = $145,733. The cash break-even quantity is then $145,733 / $4.07 = 35,807.

A Project Has a Five-Year Life, a 13% Required Rate