Niko has purchased a brand new machine to produce its High Flight line of shoes. The machine has an economic life of six years. The depreciation schedule for the machine is straight-line with no salvage value. The machine costs $714,000. The sales price per pair of shoes is $61, while the variable cost is $15. $169,000 of fixed costs per year are attributed to the machine. Assume that the corporate tax rate is 35 percent and the appropriate discount rate is 9 percent. What is the financial break-even point?
Financial Break Even Point:
Financial Break Even Point is the sales level at which npv is zero. At this sales level, all fixed cost is recouped. After the break even point, all sales directly contribute to profits. Thus lower the financial break even point sales level, better it is for the company.
Answer and Explanation:
Machine cost = $ 714,000
Depreciation= $ 714,000/6 = $ 119,000
Let no. Of units to be sold be x
Less :Variable cost = 15x
Less: Fixed cost= 169,000
Less: Depreciation= 119,000
Operating Income=46x - 388,000
Operating Income after tax = (46x - 388,000)(1-0.35)= 29.9x -252,200
Cash inflows for year 1-6 = 29.9x -252,200 + 119,000 = 29.9x -133,200
PV of cash inflow at 9% is (29.9x -133,200)*PVAF(9%,6) = (29.9x-133,200)*4.4859
Pv of cash outflow=714,000
At NPV= 0
714000 - (29.9x-133,200)*4.4859=0
Thus, x= 9778.11
Financial break even level is achieved at 9779 units sales level
Learn more about this topic:
from Financial Accounting: Help and ReviewChapter 5 / Lesson 20
Related to this Question
Become a member and unlock all Study Answers
Try it risk-free for 30 days!Try it risk-free
Ask a question
Our experts can answer your tough homework and study questions.Ask a question Ask a question
Explore our homework questions and answer library
Our tutors are standing by
Ask a study question and one of our experts will send you an answer within hours.
To ask a site support question, click here
Your question has been submitted!
When your answer is ready, it will appear on your Dashboard.