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# Sol 3 - variable costs of the expensive clubs are an inflow...

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c. The 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 the variable costs, we must include the units gained or lost from the existing clubs. Note that the
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Unformatted text preview: 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...
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