KMW Inc. sells a finance textbook for $150 each. The variable cost per book is $30 and the fixed cost per year is $30,000. The process of creating a textbook costs $150,000 and the average book has a life span of 3 years. Using straight line depreciation and a tax rate of 25%, What is the accounting break even number of books that must be sold?
A) 582
B) 667
C) 805
D) 953

Question

Quizplus · Accepted Answer

First, we need to calculate the contribution margin which is:

Selling price - Variable cost = $150 - $30 = $120

Next, we calculate the depreciation expense per book:

Depreciation expense per book = Total depreciation expense / Total number of books produced
Depreciation expense per book = $150,000 / (3 x Total number of books produced)

Using straight line depreciation, the depreciation expense per book will be constant.

Next, we can calculate the accounting break-even point in terms of units:

Accounting Break-Even Point (units) = (Fixed Costs + Depreciation Expense) / Contribution Margin

Substituting the values, we get:

Accounting Break-Even Point (units) = ($30,000 + ($150,000 / (3 x Total number of books produced))) / $120

Simplifying this expression, we get:

Accounting Break-Even Point (units) = (30000/120) + (150000/360Total number of books produced)

Accounting Break-Even Point (units) = 250 + 416.67Total number of books produced

Now, we need to solve for Total number of books produced:

Total number of books produced = (Accounting Break-Even Point (units) - 250) / 416.67

Total number of books produced = (30000/120) + (150000/360(416.67))
Total number of books produced = 250 + 667

Total number of books produced = 917

Therefore, the accounting break even number of books that must be sold is 667 rounded up to the nearest whole number. The correct answer is B.

KMW Inc Sells a Finance Textbook for $150 Each