Problem 11-29 Break-Even Analysis [LO3] This problem concerns the effect of taxe
ID: 2761939 • Letter: P
Question
Problem 11-29 Break-Even Analysis [LO3]
This problem concerns the effect of taxes on the various break-even measures. Consider a project to supply Detroit with 40,000 tons of machine screws annually for automobile production. You will need an initial $5,400,000 investment in threading equipment to get the project started; the project will last for six years. The accounting department estimates that annual fixed costs will be $800,000 and that variable costs should be $350 per ton; accounting will depreciate the initial fixed asset investment straight-line to zero over the six-year project life. It also estimates a salvage value of $280,000 after dismantling costs. The marketing department estimates that the automakers will let the contract at a selling price of $450 per ton. The engineering department estimates you will need an initial net working capital investment of $520,000. You require a 16 percent return and face a marginal tax rate of 30 percent on this project.
Calculate the accounting, cash, and financial break-even quantities. (Do not round intermediate calculations and round your final answers to the nearest whole number. (e.g., 32))
This problem concerns the effect of taxes on the various break-even measures. Consider a project to supply Detroit with 40,000 tons of machine screws annually for automobile production. You will need an initial $5,400,000 investment in threading equipment to get the project started; the project will last for six years. The accounting department estimates that annual fixed costs will be $800,000 and that variable costs should be $350 per ton; accounting will depreciate the initial fixed asset investment straight-line to zero over the six-year project life. It also estimates a salvage value of $280,000 after dismantling costs. The marketing department estimates that the automakers will let the contract at a selling price of $450 per ton. The engineering department estimates you will need an initial net working capital investment of $520,000. You require a 16 percent return and face a marginal tax rate of 30 percent on this project.
Explanation / Answer
Calculation of Accounting,cash, Financial Break even Production 40000 Initial Investment $ 5,400,000.00 Fixed Cost $ 800,000.00 Variable cost $ 350.00 Per ton Salvage Value $ 280,000.00 Selling Price $ 450.00 Per ton Net Working capital investment $ 520,000.00 Required rate of return 16% Tax rate 30% Selling Price $ 450.00 Per ton Variable cost $ 350.00 Per ton Contribution $ 100.00 Per ton Total Contribution $ 4,000,000.00 Less: Fixed Cost $ 800,000.00 Profit before tax and Depreciation $ 3,200,000.00 Depreciation $ 853,333.33 Profit before tax $ 2,346,666.67 Tax $ 704,000.00 Profit after tax $ 1,642,666.67 Add: Depreciation $ 853,333.33 Operating Cash flow $ 2,496,000.00 Accounting Break even Quantity Fixed cost/Contribution margin per unit 8000 Cash Break even Quantity Fixed cost/Contribution margin per unit 8000 Financial Break even Quantity (Fixed Cost+ OCF)/Contribution per unit 32960