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Estimate the annual unit sales required to break even

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Honeydukes Treat Shop is considering the desirability of producing a new chocolate candy called Pleasure Bombs. Before purchasing the new equipment required to manufacture Pleasure Bombs, Neville Long, the shop's proprietor performed the following analysis:

Unit selling price $1.98

Variable manufacturing and selling costs 1.73

Unit contribution margin $0.25

Annual fixed costs

Depreciation (straight-line for 4 years) $19,000

Other (all cash) 45,000

Total $64,000

Annual break-even sales volume = $64,000 / $0.25 = 256,000 units

  • Because the expected annual sales volume is 270,000 units, Long decided to undertake the production of Pleasure Bombs. This required an immediate investment of $76,000 in equipment that has a life of four years and no salvage value. After four years, the production of Pleasure Bombs will be discontinued.

Question 1: With a 40 percent tax rate and a 8 percent time value of money, determine the annual unit sales required to break even on a time-adjusted basis. Assume straight-line depreciation is used to determine tax payments.

Reference no: EM132499428

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