Niece Equipment Rentals of Del Valle, Texas, has recently been approached about the prospect of purchasing a large construction crane. The crane rents for $500 an hour but operator, fuel, insurance, and miscellaneous expenses run $200 an hour when the crane is in use. The company owner estimates that it will cost $1,000 a month to store and maintain the crane and the annual depreciation expense is $50,000.
a. Calculate the accounting break-even number of annual rental hours needed to produce zero operating earnings from the crane (before taxes).
b. Calculate the cash break-even point. If we ignore non-cash expenses such as depreciation in the break-even calculation, for how many hours must the crane be rented in order to break even on a cash basis?
c. Why do we have two different break-even points? What does each one tell you?