Problem 9-10 Financial Break-Even GDS Co. has purchased a brand new machine to p

Question

Problem 9-10 Financial Break-Even GDS Co. has purchased a brand new machine to produce its High Flight line of shoes. The machine has an economic life of five years. The depreclation schedule for the machlne Is straight-lIne with no salvage value. The machine costs $565,000. The sales price per pair of shoes is $60, while the variable cost is $14·Fixed costs of $163,000 per year are trb uted to the machine. Assume that the corporate tax rate is 34 percent and the appropriate discount rate Is 8 percent. What is the financial break-even polnt? (Do not round Intermediete celculetions and round your answer to 2 declmal places, e.g, 32.16.  , Financial break-even point units

Explanation / Answer

The formula to calculate the financial break even point in units is as under, Financial Break even quantity = (Fixed cost per annum + Annual operating cash flow) / (Selling price per unit - Variable cost per unit) Financial Break even quantity = ($163000 + $141507.90) / ($60 - $14) = 6619.74 units Financial Break even point 6619.74 units. Working Annual Operating cash flow = Initial Investment in machine / Annuity factor @ 8% for 5 years Annuity factor @ 8% for 5 years = [1-(1+r)^-n]/r Annuity factor formula = [1-(1+0.08)^-5]/0.08 = 3.99271 Annual Operating cash flow = $565000 / 3.99271 = $141507.90

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