Calculator Company proposes to invest $5 million in a new calculator making plant. Fixed costs are $2 million a year. A calculator costs $5/unit to manufacture and can be sold for
$20/unit. If the plant lasts for 3 years and the cost of capital is 12%, what is the approximate break-even level (accounting) of annual sales? (Assume no taxes.)(approximately)
A) $133,334 units
B) $272,117 units
C) $244,444 units
D) None of the above

Question

Quizplus · Accepted Answer

To calculate the break-even level of sales, we first need to calculate the total annual costs for operating the plant. This includes both fixed costs and variable costs (which are dependent on the number of units produced/sold).

Total annual cost = Fixed cost + (Variable cost per unit x number of units)

Fixed cost = $2 million
Variable cost per unit = $5
Number of units = X

Total annual cost = $2 million + ($5 X)

Now we need to consider the revenue generated from the sale of the calculators:

Revenue per unit = $20
Number of units = X

Total revenue = $20 X

To break even, the total annual cost must be equal to the total revenue:

$2 million + ($5 X) = $20 X

Solving for X:

$2 million = $15 X

X = 133,333.33 units per year (rounded up to the nearest whole unit)

Therefore, the approximate break-even level of annual sales is $244,444 units.

Calculator Company Proposes to Invest $5 Million in a New