The Solar Calculator Company proposes to invest $5 million in a new calculator-making plant that will depreciate on a straight-line basis. Fixed costs are $2 million per year. A calculator costs $5 per unit to manufacture and sells for $20 per unit. If the plant lasts for three years and the cost of capital is 12 percent, what is the accounting break-even level of annual sales? (Assume no taxes.)

Question

Quizplus · Accepted Answer

To find the accounting break-even level of annual sales, we need to calculate the total cost and the total revenue.

Total Cost = Fixed Costs + Variable Costs + Depreciation
Variable Costs = Cost per unit = $5
Depreciation = Total Cost / Useful Life = $5 million / 3 = $1.67 million per year

Total Cost = $2 million + ($5 x Q) + $1.67 million
Total Revenue = Price per unit x Quantity = $20 x Q

At the break-even point, total revenue equals total cost:
$20Q = $2 million + ($5 x Q) + $1.67 million
$15Q = $3.67 million
Q = 244,444 units

Therefore, the accounting break-even level of annual sales is 244,444 units, which is option C.

The Solar Calculator Company Proposes to Invest $5 Million in a New