A project requires an initial equipment purchase of $480,000, which will be depreciated straight-line to zero over the life of the project. The equipment will have no salvage value. Annual fixed costs are projected at $266,800. The selling price per unit is $9.90 with a variable cost per unit of $6.65. The project has a 6-year life and a required rate of return of 12%. What is the accounting break-even quantity if taxes are ignored?
A) 82,092
B) 91,538
C) 106,708
D) 109,813
E) 112,634

Question

Quizplus · Accepted Answer

The accounting break-even quantity is calculated by dividing the total fixed costs by the contribution margin per unit. The contribution margin per unit is the selling price per unit minus the variable cost per unit. The total fixed costs include both the annual fixed costs and the annual depreciation expense. The depreciation expense is the initial equipment purchase cost divided by the life of the project.1. Calculate the annual depreciation expense: $480,000 / 6 years = $80,000 per year.2. Calculate the total fixed costs: $266,800 (annual fixed costs) + $80,000 (annual depreciation) = $346,800.3. Calculate the contribution margin per unit: $9.90 (selling price) - $6.65 (variable cost) = $3.25.4. Calculate the accounting break-even quantity: $346,800 / $3.25 = 106,708 units.

A Project Requires an Initial Equipment Purchase of $480,000, Which