You have an idea to sell handmade porcelain plates. The only investment needed is a furnace (oven) that you can buy for $40,000. The furnace assumed to last for 8 years and it will be fully depreciated by the straight-line method over its economic life. Other fixed costs amount to $1,000 per year. Taxes are 30 percent. Your discount rate is 15 percent. a. What is the accounting break-even point if each plate costs $4 to make and you can sell plates for $12 apiece? b. Calculate the financial break-even point

You have an idea to sell handmade porcelain plates. The only investment needed is a furnace (oven) that you can buy for $40,000. The furnace assumed to last for 8 years and it will be fully depreciated by the straight-line method over its economic life. Other fixed costs amount to $1,000 per year. Taxes are 30 percent. Your discount rate is 15 percent. a. What is the accounting break-even point if each plate costs $4 to make and you can sell plates for $12 apiece? b. Calculate the financial break-even point

Principles of Accounting Volume 2

19th Edition

ISBN:9781947172609

Author:OpenStax

Publisher:OpenStax

Chapter3: Cost-volume-profit Analysis

Section: Chapter Questions

Problem 8EB: Shonda & Shonda is a company that does land surveys and engineering consulting. They have an...

See similar textbooks

Similar questions

Suppose you are in business and you buy a new machine for $40,000. After paying all other expenses, $7,000 is left that can be attributed to the pro. ductivity of the machine, which only has a one-year useful life. What is the rate of interest earned by this machine? If you had to pay 20 percent to borrow the money to buy such a machine, would you do so? Would you borrow the money at 10 percent?
You work for a nuclear research laboratory that is contemplating leasing a diagnostic The scanner costs RM6,300,000 and it would be depreciated straight-line to zero over four years. You can lease it for RM1,745,000 per year for four years. Assume that the tax rate is 36%. You can borrow at 8% before taxes. Justify whether you should lease or buy. Calculate the depreciation of the machine for each year. RM 6.3 mil /4 = ? Calculate the tax shield. RM 1,575,000 x 0.36 = RM 567,000 Calculate after tax lease payment RM1,745,000 x (1 – 0.36) = RM 1,116,800 Yr 0 Yr 1 Yr 2 Yr 3 Yr 4 After Tax Lease Payment RM 1,116,800 RM 1,116,800 RM 1,116,800 RM 1,116,800 Depreciation tax shield RM 567,000 RM 567,000 RM 567,000 RM 567,000 Cost of Machine (RM 6.3 mil) Total Cash Flow (RM 6.3 mil) ? ? ? ?…
A salad oil bottling plant can either buy caps for the glass bottles at 5 cents each or install $500,000 worth of plastic molding equipment and manufacture the caps at the plant. The manufacturing engineer estimates the material, labor, and other costs would be 3 cents per cap. (a) If 11 million caps per year are needed and the molding equipment is installed, what is the payback period? (b) The plastic molding equipment would be depreciated by straightline depreciation using a 6-year useful life and no salvage value. Assuming a combined 26% income tax rate, what is the after-tax payback period, and what is the after-tax rate of return?
The initial cost needed to set up your freelancing engineering design service is $50,000. The salvage value of the equipment you purchased is $2,500 after five years. You estimated that each hour of design would cost you $75 per day. If you offered your services online with a price of $310 per day, how many days per year must you work to break even if the interest rate is 10% per year?
You are the owner of a small boutique. You need to decide if you should upgrade your storage and display counters. The total cost is $2,000, and the depreciation rate is 8% per year. The expected increase in next year’s revenues as a result of the investment is $400. Assuming an annual interest rate of 5%, answer the following questions: (a) What is the present value of the benefits? (b) What is the present value of the costs? (c) Should you make this investment?
Your company is considering the replacing an old machine with a more efficient model. The new machine costs $39,500, will last for 7 years and save $12,900 per year in expenses. The discount rate is 18% and the tax rate is 26%. The machine will be depreciated on a straight line basis to zero. The old machine is fully depreciated and can be sold today for $2,700. A) what is the amount of initial investment required? B) what is the after-tax gain on the sale of the old machine? The old machine is fully depreciated. C) what is the amount of operating cash flow (OCF) per year? D) what is the NPV of the project?
Chauhan Restaurant is considering the purchase of a soufflé maker that costs $10,100. The soufflé maker has an economic life of 6 years and will be fully depreciated by the straight-line method. The machine will produce 1,700 soufflés per year, with each costing $2.80 to make and priced at $4.75. The discount rate is 12 percent and the tax rate is 25 percent. What is the NPV of the project? (Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.)
Lillian is considering using some of the cash generated from her mail-order business to open a retail store. The fixed investment in the store is expected to be $3.5 million. This investment can be depreciated straight line over five years. Variable costs are estimated to be 35% of sales. The tax rate is 0%. Cash fixed costs total $600,000 per year. a) What is the net income breakeven point (in sales $) during the first five years? What is it after the fifth
If you buy the new machine you will be able to sell the existing machine for $6,000. The new machine will cost $10,000 for delivery and installation, on top of the purchase price. Making your product more quickly is important because you currently cannot meet the demands of your orders. You are currently selling every widget you produce. The machine will cost $100,000 today and will require annual maintenance of $5,000 each year (except for the final year), starting at the end of the first year. You expect that your machine will last for 8 years before you need to purchase the next machine. At that time, you expect you will be able to sell the machine for $7,800. You can buy the machine now and have it delivered and installed by tomorrow. You expect that you will sell 2,000 more widgets in year 1 and that this number will increase by 20% each year for the next 4 years after that before leveling off at that level of sales for the remaining years you own the machine. You can obtain more…
Your landscaping company can lease a truck for $7,200 a year (paid at year-end) for 6 years. It can instead buy the truck for $35,000. The truck will be valueless after 6 years. The interest rate your company can earn on its funds is 7%. a. What is the present value of the cost of leasing? (Do not round intermediate calculations. Round your answer to 2 decimal places.) b. Is it cheaper to buy or lease? c. What is the present value of the cost of leasing if the lease payments are an annuity due, so the first payment comes immediately? (Do not round intermediate calculations. Round your answer to 2 decimal places.) d. Is it now cheaper to buy or lease?
You are considering buying a piece of industrial equipment to automate a part of your production process. This automation will save labor costs by as much as $30,654 per year over 9 years. What is the maximum amount that you would pay for this equipment your interest rate is 10%? (your answer must be rounded off to the nearest dollar, i.e., no decimal places)
You are thinking of opening a small copy shop. It costs $3500 to rent a copier for a year, and it costs $0.03 per copy to operate the copier. Other fixed costs of running the store will amount to $350 per month. You plan to charge an average of $0.10 per copy, and the store will be open 365 days per year. Each copier can make up to 100,000* copies per year. a) For a charge per copy between $0.07 to $0.11 and daily demands of 500, 1000, 1500, and 2000 copies per day, find annual profit. That is, find annual profit for each of these combinations of charge per copy and daily demand. use a two way table