Inc. is considering a new product. The proposal is as follows:
Project cost: $2,000,000
Project life: 5 yrs
Salvage value: zero
Depreciation: straight line to zero
Sales projection: 180 units per year
Price per unit: $20,000
Variable cost per unit will be: $12,400
Fixed costs per year: $490,000
Required return on the project: 10%
Relevant tax rate: 35%
Based on our past experience, the unit sales, variable costs and fixed cost projections are probably accurate to within plus or minus 10%
What is the cash break-even level of output for this project (ignoring taxes)?
What is the accounting break-even level of output for this project? What is the degree of operating leverage at the accounting break-even point? How do you interpret this number?