Dime a Dozen Diamonds makes synthetic diamonds by treating carbon. Each diamond can be sold for $100.
The materials cost for a standard diamond is $40. The fixed costs incurred each year for the factory upkeep and administrative expenses are $200,000.
The machine costs $1 million and is depreciated straight-line over 10 years to a salvage value of zero.
a. What is the accounting break-even level of sales in terms of the number of diamonds sold?
b. What is the economic break-even level of sales assuming a tax rate of 35 percent, a 10 year project life, and a discount of 12 percent?