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