Project Evaluation:
A company is considering a project to manufacture a product with the following pro forma cost and sales information: Accounting Breakeven QUANTITY = 10,500 units; Cash Breakeven QUANTITY = 8,200 units; Project Life = 5 years ($0 SALVAGE VALUE); Fixed Costs = $ 140,000; VC per unit = $24; Required Return = 16%. Ignore taxes and assume straight line depreciation.
1. What is the PRICE of the product under this expense model?
2. What is the Cost (Initial Investment) of the project? (Hint: the cost will be depreciated to 0, so it is linked to depreciation
3. What is the project’s ACCOUNTING Breakeven Sales Volume in DOLLARS? (be consistent)
What is the project’s financial BE point?
4. What is the project’s Degree of Operating Leverage (DOL) at projected sales of 12,200 units?
If actual Sales are 10% lower than 12,200 units, by what percentage will Operating profits change?