| a. What were total production costs? b. What is the marginal cost per pair? c. What is the average cost? d. If the company is considering a one-time order for an extra 7,000 pairs, what is the minimum acceptable total revenue from the order? 2. | At an output level of 11,000 units, you have calculated that the degree of operating leverage is 2.55. The operating cash flow is $25,300 in this case. |
a. Ignoring the effect of taxes, what are fixed costs? | b. What will the operating cash flow be if output rises to 12,500 units? |
c. What will the operating cash flow be if output falls to 9,500 units? | A proposed project has fixed costs of $47,000 per year. The operating cash flow at 10,000 units is $63,000. |
| a. Ignoring the effect of taxes, what is the degree of operating leverage? | b. If units sold rise from 10,000 to 10,300, what will be the increase in operating cash flow? c. What is the new degree of operating leverage? | 4. We are evaluating a project that costs $709,000, has a life of 11 years, and has no salvage value. Assume that depreciation is straight-line to zero over the life of the project. Sales are projected at 89,000 units per year. Price per unit is $39, variable cost per unit is $28, and fixed costs are $717,508 per year. The tax rate is 23 percent, and we require a return of 19 percent on this project. |
| 1a. Calculate the accounting break-even point 1b. What is the degree of operating leverage at the accounting break-even point? 2a. Calculate the base-case cash flow. 2b. Calculate the NPV. 2c. What is the sensitivity of NPV to changes in the quantity sold? 2d. What your answer tells you about a 500-unit decrease in the quantity sold? 3a. What is the sensitivity of OCF to changes in the variable cost figure? 3b. How much will OCF change if variable costs decrease by $1? 5. | Consider each of the following cases: |
| Case | Accounting Break-Even | Unit Price | Unit Variable Cost | Fixed Costs | Depreciation | | 1 | 134,600 | $ 42 | $ 33 | $ 813,000 | ? | | 2 | 137,000 | ? | 45 | 2,700,000 | $ 1,300,000 | | 3 | 5,221 | 85 | ? | 179,000 | 85,000 | | a. Find the depreciation for Case 1. b. Find the unit price for Case 2. | c. Find the unit variable cost for Case 3 6. Night Shades Incorporated (NSI) manufactures biotech sunglasses. The variable materials cost is $1.65 per unit, and the variable labor cost is $2.31 per unit. a. What is the variable cost per unit? b. Suppose the company incurs fixed costs of $680,000 during a year in which total production is 408,000 units. What are the total costs for the year? c. If the selling price is $10 per unit, what is the NSI break-even on a cash basis? d. If depreciation is $244,800 per year, what is the accounting break-even point? 7. Consider a project with a life of 9 years with the following information: initial fixed asset investment = $320,000; straight-line depreciation to zero over the 9-year life; zero salvage value; price = $36; variable costs = $15; fixed costs = $115,200; quantity sold = 47,232 units; tax rate = 22 percent. How sensitive is OCF to changes in quantity sold? 8. | We are evaluating a project that costs $823,000, has a life of ten years, and has no salvage value. Assume that depreciation is straight-line to zero over the life of the project. Sales are projected at 96,000 units per year. Price per unit is $43, variable cost per unit is $21, and fixed costs are $835,345 per year. The tax rate is 25 percent, and we require a return of 14 percent on this project. The projections given for price, quantity, variable costs, and fixed costs are all accurate to within +/- 17 percent. |
| a. Calculate the best-case NPV. b. Calculate the worst-case NPV. |
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