Reference no: EM132983930

Question - Smith Brothers has a choice of two projects. Project A has annual fixed costs of $300,000 while project B has Annual Fixed costs of $1m. Project A has depreciation and amortization of $100,000 and project B has depreciation and amortisation of $250,000. The possible projects are for the sale of computer keyboards. These keyboards will sell for $25 each. The variable costs for project A are $15 and $7 for project B. The EBIT of project A is $400,000 and the EBITDA of Project B is $2m.

a) Calculate the Cash Flow Cross Over Level of Unit Sales.

b) Calculate the Accounting Cross Over Level of Unit Sales.

c) Calculate the Cash Flow DOL for Project A.

d) Calculate the Accounting DOL for Project A.

e) Calculate the Cash Flow DOL for Project B.

f) Calculate the Accounting DOL for Project B.

g) If the cash flow cross over level of sales for a project is 1m units and you expect to produce and sell 560,000 units, would you invest in the project with the high or low fixed costs?