# James, Inc., has purchased a brand new machine to produce its High Flight line of shoes. The machine has an economic life of 5 years. The depreciation schedule for the machine is straight-line with no salvage value. The machine costs \$540,000. The sales price per pair of shoes is \$77, while the variable cost is \$29. Fixed costs of \$245,000 per year are attributed to the machine. The corporate tax rate is 22 percent and the appropriate discount rate is 9 percent. What is the financial break-even point? (Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16)

3,074 units sold or total revenue of \$236,698 per year

Explanation:

cost of machine \$540,000

depreciation expense per year = \$540,000 / 5 = \$108,000

contribution margin per unit sold = \$77 - \$29 = \$48

we generally calculate the financial break even point of a business by using the following formula:

= EBIT × (1 - interest expense) × (1 - tax rate) - preferred dividends

But when we are dealing with projects, the financial break even point is the sales level at which the project's NPV = \$0. If the sales level is lower, then the project will be rejected, and if the sales level is higher, then it should be accepted.

using an annuity formula, the free cash flow per year needed for the NPV = \$0 is \$540,000 / 3.8897 (PV annuity factor, 9%, 5 periods) = \$138,828.19

\$138,828.19 = {[(unit sales x \$48) - \$108,000] x 0.78} + \$108,000

\$30,828.19 = [(unit sales x \$48) - \$108,000] x 0.78

\$39,523.32 = (unit sales x \$48) - \$108,000

\$147,523.32 = unit sales x \$48

unit sales = \$147,523.32 / \$48 = 3,073.40 units ≈ 3,074 units sold

The financial break-even point is approximately 5,104 units.

### Explanation:

The financial break-even point can be calculated by determining the number of units that need to be sold in order to cover the fixed costs. First, we need to calculate the contribution margin per unit, which is the sales price per unit minus the variable cost per unit. In this case, it is \$77 - \$29 = \$48. Next, we divide the fixed costs by the contribution margin per unit to find the break-even point in units. Using the formula: Break-even point (in units) = Fixed costs / Contribution margin per unit. Plugging in the numbers, we get: \$245,000 / \$48 = 5,104.17. Therefore, the financial break-even point is approximately 5,104 units.

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## Related Questions

If the percentage change in the quantity demanded of a good is greater than the percentage change in the price of the good, then how is the demand for the good characterized?

Price Elastic

Explanation:

We know that

The formula to compute the price elasticity of demand is shown below:

= (Percentage change in quantity demanded) ÷ (percentage change in price)

The classification as follows

1. Perfectly inelastic = If zero

2. Inelastic = When elasticity is below than one

3. Unitary elastic = When elasticity is equal to one

4. Elastic = When elasticity is exceeded than one

5. Perfectly elastic = When elasticity is in infinity

Since the  percentage change in the quantity demanded of a good is greater than the percentage change in the price of the good which reflects that the elasticity is more than one

The demand is price elastic in nature because it is greater than 1.

Explanation:

Price Elasticity of demand refers to the response of quantity demanded of a good to the change in price. Of course, when the price decreases, quantity demanded of a good increases and vice-versa but to how much degree is determined by the Price Elasticity of demand.

Mathematically, Price Elasticity of Demand is the ratio of % change in quantity demanded of a good and % change in the price of a good i.e.

Price Elasticity of Demand = % change in quantity demanded of a good / % change in the price of a good

In the problem, since the percentage change in the quantity demanded of a good is greater than the percentage change in the price of the good, the above ratio will be greater than 1. Hence, the demand of the good is price elastic.

SIROM Scientific Solutions has \$10 million of outstanding equity and \$5 million of bank debt. The bank debt costs 5% per year. The estimated equity beta is 2. If the market risk premium is 9% and the risk-free rate is 3%, compute the weighted average cost of capital if the firm’s tax rate is 30%.

15.167%

Explanation:

For computing the WACC we need to do the following calculations which are shown below:

Cost of equity = Risk free rate + Beta × Market risk premium

= 3% + 2 × 9%

= 21%

After tax cost of debt = Cost of debt ×  (1-Tax Rate)

= 5% × (1 - 0.30)

= 3.50%

Now

WACC = Weight of debt ×  Cost of debt + Weight of equity × Cost of equity

= 5 ÷ 15 × 3.50 + 10 ÷ 15 × 21

= 1.167% + 14%

= 15.167%

Suppose there is a policy debate regarding the United States’ imposing trade restrictions on imported steel rods. Read the following scenario and answer the question that follows.
The president of the United States argues that the United States should threaten to impose a tariff on Chinese steel rods in order to induce the Chinese to remove its tariff on American cars.
Which of the following justifications is the pundit using to argue for the trade restriction on steel rods?

a. National-security argument
b. Infant-industry argument
c. Jobs argument
d. Using-protection-as-a-bargaining-chip argument
e. Unfair-competition argument

Jobs argument justifications is the pundit using to argue for the trade restriction on steel rods

Explanation:

A main argument often put forward to curb trade would be that trade decreases the amount of jobs domestically available.

The point about maintaining jobs is often put forward by employers to protect union jobs. Nevertheless, unions are undermining the market by prohibiting businesses from receiving their products at lower prices, causing them to increase prices. Moreover, businesses are often discouraged from using automation or robotics to retain jobs, which is ironic because automation and robotics improve the productivity of workers, thereby encouraging companies to pay employee salaries and benefits.

Sheridan Company signed a three-month, zero-interest-bearing note on November 1, 2020 for the purchase of \$497000 of inventory. The face value of the note was \$509000. Sheridan used a "Discount of Note Payable" account to initially record the note. Assuming that the discount will be amortized equally over the 3-month period and that there was no adjusting entry made for November, the adjusting entry made at December 31, 2020 will include aa. debit to Discount on Note Payable.b. debit to Interest Expense .c. credit to Discount on Note Payable.d. credit to Interest Expense.

Explanation:

The journal entry to record the note payable at discount

Cash A/c Dr \$497,000

Discount on Note payable A/c  Dr \$12,000

To Note Payable A/c \$509,000

(Being the note payable is recorded at discount)

Now we know that the discount is for 3 months but we have to calculated for 2 months only i.e from November 1 to December 31

So, the discount would be

= \$12,000 × 2 months ÷ 3 months

= \$8,000

And the journal entry is

Interest Expense A/c Dr \$8,000

To Discount on Note payable A/c \$8,000

(Being the interest expense is recorded)

Which of the following statements are inconsistent with the efficient market hypothesis?a. The average annual return on stocks is greater than zero. b. Stocks that outperform the index in March always underperform it in April. c. Half of fund managers are able to beat their relevant index each year, before fees. d. Stocks that outperform the index in March always outperform it in April.

b. Stocks that outperform the index in March always underperform it in April.

d. Stocks that outperform the index in March always outperform it in April.

Explanation:

The Efficient market hypothesis states that in an efficient market, all the available information in the market are reflected in the prices of the stocks being traded. As such, all stock are fairly priced.

Stocks that perform in a certain way in March and then in another way in April are violations of the hypothesis. This is because if indeed the market was efficient, the prices would adjust to reflect the different performances by month such that there would be no more fluctuations.

Nuzum Corporation has two divisions: Division M and Division N. Data from the most recent month appear below: Total Company Division M Division N Sales \$557,000 \$254,000 \$303,000 Variable expenses 144,910 81,280 63,630 Contribution margin 412,090 172,720 239,370 Traceable fixed expenses 273,000 128,000 145,000 Segment margin 139,090 44,720 94,370 Common fixed expenses 94,690 43,180 51,510 Net operating income \$ 44,400 \$ 1,540 \$ 42,860 Management has allocated common fixed expenses to the Divisions based on their sales. The break-even in sales dollars for Division N is closest to:

\$ 183,544.30 = \$ 183,544

Explanation:

Nuzum Corporation

Total             Division M         Division N

Sales                              \$557,000          \$254,000      \$303,000

Variable expenses          144,910             81,280             63,630

Contribution margin        412,090            172,720          239,370

Traceable fixed expenses 273,000        128,000          145,000

Segment margin                139,090          44,720            94,370

Common fixed expenses 94,690           43,180               51,510

Net operating income    \$ 44,400          \$ 1,540           \$ 42,860

First we find the Segment CM ratio by the following formula:

Segment Contribution Margin Ratio= Segment Sales- Segment Variable Expenses/ Sales

Segment Contribution Margin Ratio= 303,000 -63630/303000

Segment Contribution Margin Ratio= 239370/303000=0.79

Then we find the break even sales in dollars.

Break Even Sales in Dollars= Traceable Fixed Expense/ Segment Contribution Margin Ratio

Break Even Sales in Dollars =145,000/0.79=  \$ 183,544.303