In early 1990,Boeing Co. decided to gamble $4 billion to build a new long distan
ID: 2701726 • Letter: I
Question
In early 1990,Boeing Co. decided to gamble $4 billion to build a new long distance ,350-seat wide body airplane called the Boeing 777.The price tag for the 777, scheduled for delivery beginning in 1995,is about $120 million apiece .Assume that Boeings $4billion investment is made at the rate of 800million a year for the years 1990 through 1994 and that the present value of the tax write-off associated with these costs is 750 million. On the basis of estimated annual fixed costs of $100 million, variable production costs of $90 million apiece, a marginal corporate tax rate of 34% and the discount rate of %14, what is the break even quantity of annual unit sales over the Boeing 777 projected 15 year life? Assume that all cash inflows and outflows occur at the end of the year
PLEASE SHOW ALL CALCULATIONS SO I CAN UNDERSTAND. (Also when posting make sure there are no wierd symbols attached which make it hard to follow .Somehow this happens quite often even when a question is posted)
Explanation / Answer
An analysis to determine the point at which revenue received equals the costs associated with receiving the revenue. Break-even analysis calculates what is known as a margin of safety, the amount that revenues exceed the break-even point. This is the amount that revenues can fall while still staying above the break-even point.
Investopedia Says
Investopedia explains 'Break-Even Analysis'
Break-even analysis is a supply-side analysis; that is, it only analyzes the costs of the sales. It does not analyze how demand may be affected at different price levels.
For example, if it costs $50 to produce a widget, and there are fixed costs of $1,000, the break-even point for selling the widgets would be:
If selling for $100: 20 Widgets (Calculated as 1000/(100-50)=20)
If selling for $200: 7 Widgets (Calculated as 1000/(200-50)=6.7)
In this example, if someone sells the product for a higher price, the break-even point will come faster. What the analysis does not show is that it may be easier to sell 20 widgets at $100 each than 7 widgets at $200 each. A demand-side analysis would give the seller that information.
Break-even analysis is a very useful cost accounting technique. It is part of a larger analytical model called cost-volume-profit (CVP) analysis, and it helps you determine how many product units your company needs to sell to recover its costs and start realizing profit. Learning how to do a break-even analysis is a matter of following a few steps.
== Steps ==
# Determine your company's fixed costs. Fixed costs are any costs that don't depend on the volume of production. Rent and utilities would be examples of fixed costs, because you will pay the same amount for them no matter how many units you produce or sell. Categorize all your firm's fixed costs for a given period and add them together.
# Determine your company's variable costs. Variable costs are those that will fluctuate along with production volume. For example, a business that performs oil changes will have to purchase more oil filters if they perform more oil changes, so the cost of buying oil filters is a variable cost. In fact, because the company can expect to buy 1 oil filter per oil change, this cost can be allocated to each oil change performed.
# Determine the price at which you will sell your product. Pricing strategies are part of the much more comprehensive marketing strategy, and can be fairly complex. However, you know that your price will be at least as high as your production costs (in fact, a lot of anti-trust legislation exists to outlaw selling below cost).
# Calculate your unit contribution margin. The unit contribution margin represents how much money each unit sold brings in after recovering its own variable costs. It is calculated by subtracting a unit's variable costs from its sales price. Consider the following example using an oil change business.
#* The sales price of an oil change is $40 (note that these calculations will work equally well when expressed in other currencies). Each oil change has 3 costs associated with it: purchasing a $5 oil filter, purchasing a $5 can of oil, and paying $10 in wages to the technician performing the oil change. These are the variable costs associated with an oil change.
#* The contribution margin for a single oil change is: 40 %uFFFD (5 + 5 + 10) or $20. Providing an oil change to a customer brings the company $20 in revenue after recovering its own variable costs.
# Calculate your company's break-even point. The break-even point tells you the volume of sales you will have to achieve to cover all of your costs. It is calculated by dividing all your fixed costs by your product's contribution margin.
#* Using the example above, imagine all of your company's fixed costs for a given month are $2000. Therefore, the break-even point is: 2000 / 20 or 100 units. When 100 oil changes have been performed in a month, the company "breaks even."
# Determine your expected profits or losses. Once you have determined the break-even volume, you can estimate your expected profits. Remember that each additional unit sold will produce revenue equal to its contribution margin. Therefore, each unit sold above the break-even point will produce a profit equal to its contribution margin, and each unit sold below the break-even point will generate a loss equal to its contribution margin.
#* Using the example above, imagine your business provides 150 oil changes in a month. Only 100 oil changes were needed to break even, so the additional 50 oil changes generated a profit of $20 each, for a total of (50 * 20) or $1000.
#* Now imagine your business provided only 90 oil changes in a month. You didn't achieve your break-even volume, so you sustained a loss. Each of the 10 oil changes under your break-even volume generated a loss of $20, for a total of (10 * 20) or $200.