Answered: a. Calculate the accounting and cash…

Practical Management Science

6th Edition

ISBN:9781337406659

Author:WINSTON, Wayne L.

Publisher:WINSTON, Wayne L.

Chapter9: Decision Making Under Uncertainty

Section: Chapter Questions

Problem 30P

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Question

Module 5 Question 8

Mayborn Enterprises, LLC runs a number of sporting goods businesses and is currently analyzing a new T-shirt printing business. Specifically, the company is evaluating the feasibility of this business based on its estimates of the unit sales, price per unit, variable cost per unit, and fixed costs. The company's initial estimates of annual sales and other critical variables are shown here:

Base Case
Unit sales 7,500
Price per unit $16.00
Variable cost per unit $10.00
Fixed cash expense per year $10,000
Depreciation expense $4,000

a. Calculate the accounting and cash break-even annual sales volume in units.

b. Bill Mayborn is the grandson of the founder of the company and is currently enrolled in his junior year at the local state university. After reviewing the accounting break-even calculation done in part a, Bill wondered if the depreciation expense should be included in the calculation. Bill had just completed his first finance class and was well aware that depreciation is not an actual out-of-pocket expense but rather an allocation of the cost of the printing equipment used in the business over its useful life. What do you think? What can you learn from the cash and accounting break-even points?

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Follow-up Question

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Part 1

(Related to Checkpoint 13.4) (Using break-even analysis) Mayborn Enterprises, LLC runs a number of sporting goods businesses and is currently analyzing a new T-shirt printing business. Specifically, the company is evaluating the feasibility of this business based on its estimates of the unit sales, price per unit, variable cost per unit, and fixed costs. The company's initial estimates of annual sales and other critical variables are shown here:

a. Calculate the accounting and cash break-even annual sales volume in units.

Bill wondered if the depreciation expense should be included in the calculation. Bill had just completed his first finance class and was well aware that depreciation is not an actual out-of-pocket expense but rather an allocation of the cost of the printing equipment used in the business over its useful life. What do you think? What can you learn from the cash and accounting break-even points?

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Part 1

a. The accounting break-even units of production is

2333.332333.33

units. (Round to the nearest integer.)

Part 2

The cash break-even units of production is

16671667

units. (Round to the nearest integer.)

Part 3

The

cash break-even or accounting break-even?

point tells us the level of sales necessary to cover our total fixed and variable operating costs where total fixed costs include both cash fixed costs and depreciation expense (which is not a cash expense for the period), while the

cash break-even or accounting break-even?

point tells us the level of sales where we have covered our cash fixed costs (ignoring depreciation) and as a result our cash flow is zero.

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Follow-up Question

The cash break-even units of production is ______ units.

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