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Steven, M.Acc.
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Category: Business and Finance Homework
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1. The marvel mfg. company is considering whether or not to

Resolved Question:

1. The marvel mfg. company is considering whether or not to construct a new robotic production facility. The cost of this new facility is $618,000 and it is expected to have a six-year life with annual depreciation expense of $103,000 and no salvage value. Annual sales from the new facility are expected to be 1,960 units with a price of $1,010 per unit. Variably production costs are $610 per unit, while fixed cash expenses are $78,000 per year.
A. Find the accounting and the cash break-even units of production
B. Will the plane make a profit based on its current expected level of operations?
C. Will the plant contribute cash flow to the firm at the expected level of operations?
Submitted: 5 years ago.
Category: Business and Finance Homework
Expert:  Steven, M.Acc. replied 5 years ago.
Hello,

(A) Accounting break-even point:

Q = Total fixed costs / Contribution margin per unit
Q = ($78,000 + 103,000) / ($1,010 – 610)
Q = 452.5 units.

Cash break-even point:

Q = Cash fixed costs / Contribution margin per unit
Q = $78,000 / ($1,010 – 610)
Q = 195 units.

(B) Yes, the plant will make a profit based on its current expected level of operations:

Excess units produced over break-even = 1,960 – 452.5 = 1,507.5
Contribution margin per unit = $1,010 – 610 = $400
Net profit = $400 × 1,507.5 = $603,000.

To check:

Gross profit = Sales – COGS = $1,979,600 – 1,195,600 = $784,000
Overhead = $103,000 + 78,000 = $181,000.
Net profit = Gross profit – Overhead = $784,000 – 181,000 = $603,000.

(C) Yes, the plant will contribute cash flow to the firm at the expected level of operations:

Excess units produced over break-even = 1,960 – 195 = 1,765
Contribution margin per unit = $1,010 – 610 = $400
Net profit = $400 × 1,765 = $706,000.

To check:

Gross profit = Sales – COGS = $1,979,600 – 1,195,600 = $784,000
Cash overhead = $78,000
Net profit = Gross profit – Cash overhead = $784,000 – 78,000 = $706,000.
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