Break even analysis The marvel Mfg. Company is considering whether or not to con
ID: 2702623 • Letter: B
Question
Break even analysis
The marvel Mfg. Company is considering whether or not to construct a new robotic production facility. The cost of the new facility is $588,000 and it is expected to have a six-year life with annual depreciation expense of $98,000 and now salvage value. Annual sales from the new facility are expected to be 2,030 units with a price of $1,020 per unit. Variable production costs are $560 per unit, while fixed cash expenses are $84,000 per year.
a. Find the accounting and the cash break-even units of production.
b. Will the plant make a profit based on its current expected level of operations?
c. Will the plant contribute cash flow to the firm at the expected level of operations?
<?xml:namespace prefix = o ns = "urn:schemas-microsoft-com:office:office" />
Explanation / Answer
a)
for accounting break even units = (fixed cost + depreciation)/(price - variable cost per unit)
= (84000 + 98000)/(1020-560) = 395.652
for cash break even units = fixed cost/(price - variable cost per unit)
= 84000/560
= 150
b)
annual sales revenue = 2030 * 1020 = 2070600
annual cost of sales = 560*2030 + 84000 = 1220800
annual depreciation expense = 98000
annual income = 2070600-1220800 - 98000 = 751800
yes the firm will make a gross profit of 751800
c)
cash flow = sales - cost of sales = 2070600-1220800 = 849800
yes the plant will contribute cashflow to the firm.
please rate my answer!
thanks in advance :)