Rita's Flowers is considering a 3-year project with a discount rate of 12 percent, a tax rate of 34 percent, and an initial cost of $12,000 for fixed assets

Finance Dec 22, 2020

Rita's Flowers is considering a 3-year project with a discount rate of 12 percent, a tax rate of 34 percent, and an initial cost of $12,000 for fixed assets. The selling price is estimated at $22 a unit based on variable costs per unit of $6.20 and fixed costs of $2,280. Depreciation is straight-line to zero over 3 years. What is the accounting breakeven point?

Expert Solution

Computation of Accounting Breakeven Point:

Accounting Breakeven Point = (Fixed Cost + Depreciation)/Contribution Margin per Unit

Here,

Fixed Cost = $2,280

Depreciation = ($12,000-0)/3 =$4,000

Contribution Margin per Unit = Sales Price per Unit - Variable Cost per Unit = $22-$6.20 = $15.80 per unit

Accounting Breakeven Point = ($2,280+$4,000)/$15.80 = 397.47 or 397 units

So, Accounting Breakeven Point is 397 units.

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