Chapter 11 solution

# Chapter 11 solution - Basic 1. a. The total variable cost...

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Basic 1. a. The total variable cost per unit is the sum of the two variable costs, so: Total variable costs per unit = \$5.43 + 3.13 Total variable costs per unit = \$8.56 b. The total costs include all variable costs and fixed costs. We need to make sure we are including all variable costs for the number of units produced, so: Total costs = Variable costs + Fixed costs Total costs = \$8.56(280,000) + \$720,000 Total costs = \$3,116,800 c. The cash breakeven, that is the point where cash flow is zero, is: Q C = \$720,000 / (\$19.99 – 8.56) Q C = 62,992.13 units And the accounting breakeven is: Q A = (\$720,000 + 220,000) / (\$19.99 – 8.56) Q A = 82,239.72 units 2. The total costs include all variable costs and fixed costs. We need to make sure we are including all variable costs for the number of units produced, so: Total costs = (\$24.86 + 14.08)(120,000) + \$1,550,000 Total costs = \$6,222,800 The marginal cost, or cost of producing one more unit, is the total variable cost per unit, so: Marginal cost = \$24.86 + 14.08 Marginal cost = \$38.94

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The average cost per unit is the total cost of production, divided by the quantity produced, so: Average cost = Total cost / Total quantity Average cost = \$6,222,800/120,000 Average cost = \$51.86 Minimum acceptable total revenue = 5,000(\$38.94) Minimum acceptable total revenue = \$194,700 Additional units should be produced only if the cost of producing those units can be recovered. 3. The base-case, best-case, and worst-case values are shown below. Remember that in the best-case, sales and price increase, while costs decrease. In the worst-case, sales and price decrease, and costs increase. Unit Scenario Unit Sales Unit Price Variable Cost Fixed Costs Base 95,000 \$1,900.00 \$240.00 \$4,800,000 Best 109,250 \$2,185.00 \$204.00 \$4,080,000 Worst 80,750 \$1,615.00 \$276.00 \$5,520,000 4. An estimate for the impact of changes in price on the profitability of the project can be found from the sensitivity of NPV with respect to price: NPV/ P. This measure can be calculated by finding the NPV at any two different price levels and forming the ratio of the changes in these parameters. Whenever a sensitivity analysis is performed, all other variables are held constant at their base-case values. 5. a . To calculate the accounting breakeven, we first need to find the depreciation for each year. The depreciation is: Depreciation = \$724,000/8 Depreciation = \$90,500 per year And the accounting breakeven is: Q A = (\$780,000 + 90,500)/(\$43 – 29) Q A = 62,179 units To calculate the accounting breakeven, we must realize at this point (and only this point), the OCF is equal to depreciation. So, the DOL at the accounting breakeven is: DOL = 1 + FC/OCF = 1 + FC/D DOL = 1 + [\$780,000/\$90,500] DOL = 9.919 b. We will use the tax shield approach to calculate the OCF. The OCF is: OCF base = [(P – v)Q – FC](1 – t c ) + t c D OCF base = [(\$43 – 29)(90,000) – \$780,000](0.65) + 0.35(\$90,500) OCF base = \$343,675

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Now we can calculate the NPV using our base-case projections. There is no salvage
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## This note was uploaded on 01/29/2012 for the course MAN 4635 taught by Professor Q during the Spring '11 term at Metro State.

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Chapter 11 solution - Basic 1. a. The total variable cost...

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