The c. accounting breakeven is:
QA
=
(
FC +
D)/(P
v)
QA
= [$225,000 + ($720,000/4)]/($21,000 15,000)
QA
= 68
At the accounting breakeven, the DOL is:
DOL = 1 + FC/OCF
DOL = 1 + ($225,000/$180,000) = 2.25
For each 1% increase in unit sales, OCF will increase by 2.25%.
14. The marketing study and the research and development are both sunk costs and should be ignored.
We will calculate the sales and variable costs first. Since we will lose sales of the expensive clubs
and gain sales of the cheap clubs, these must be accounted for as erosion. The total sales for the new
project will be:
Sales
New clubs $700 55,000 = $38,500,000
Exp. clubs $1,100 (13,000) = 14,300,000
Cheap clubs $400 10,000 = 4,000,000
$28,200,000
For variable the costs, we must include the units gained or lost from the existing clubs. Note that the
variable costs of the expensive clubs are an inflow. If we are not producing the sets any more, we
will save these variable costs, which is an inflow. So:
Var. costs
New clubs $320 55,000 = $17,600,000
Exp. clubs $600 (13,000) = 7,800,000
Cheap clubs $180 10,000 = 1,800,000
$11,600,000
The pro forma income statement will be:
Sales $28,200,000
Variable costs 11,600,000
Fixed costs 7,500,000
Depreciation 2,600,000
EBT 6,500,000
Taxes 2,600,000
Net income $ 3,900,000
Using the bottom up OCF calculation, we get:
OCF = NI + Depreciation = $3,900,000 + 2,600,000
OCF = $6,500,000