Farrington Enterprises runs a number of sporting goods businesses and is currently analyzing a new T-shirt printing business. Specifically, the company is evaluating the feasibility of this business based on its estimates of unit sales, the price per unit, variable cost per unit, and fixed costs. The company’s initial estimates of annual sales and other critical variables are as follows:

Base Case

Unit sales ............ 5,000

Price per unit ............$12.00

Variable cost per unit ........ 8.00

Fixed cash expense per year ......10,000

Depreciation expense ........ 5,000

a. Calculate the accounting and cash break-even annual sales volume in units.

b. Bill Farrington is the grandson of the founder of the company and is currently enrolled in his junior year at the local state university. After reviewing the accounting break-even calculation done in part a, Bill wondered if the depreciation expense should be included in the calculation. Bill had just completed his first finance class and was well aware that depreciation is not an actual out-of-pocket expense but an allocation of the cost of the printing equipment used in the business over its useful life. What do you think? What do the cash and accounting break-even points tell you?