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Computing average costs – Excel

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Excel Simulation Difficulty: 1 Basic Section: 11.3 Break-Even Analysis

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Operating cash flow and leverage – Excel

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Excel Simulation Difficulty: 1 Basic Section: 11.5 Operating Leverage

Mountain Goat Inc. produces mountain climbing gear. The company can manufacture mountain climbing
shoes for $20.05 per pair in raw material costs and $16.61 per pair in labor expense. The shoes sell for
$106 per pair. Last year, production was 180,000 pairs, and the fixed costs of producing the shoes were
$730,000.

Required:
(a) What were total production costs? (Do not round your intermediate calculations.)

(Click to select)

(b) What is the marginal cost per pair? (Do not round your intermediate calculations.)

(Click to select)

(c) What is the average cost per pair? (Do not round your intermediate calculations.)

(Click to select)

(d)The company is considering a one-time order for an extra 8,000 pairs. What is the minimum total
revenue the firm should accept for producing these extra shoes? (Do not round your intermediate
calculations.)

(Click to select)

rev: 09_18_2012

References

Worksheet Learning Objective: 11-03 How
to determine and interpret cash,
accounting, and financial break-
even points.

Difficulty: Basic Section: 11.3 Break-Even
Analysis

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Calculating break-even – Excel

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Excel Simulation Difficulty: 1 Basic Section: 11.4 Operating Cash Flow, Sales Volume, and Break-
Even

Day Vision Inc. produces sunglasses. The company uses $1.37 in materials and $2.6 in labor to construct
each pair. Over the course of one year, Day Vision incurs fixed costs of $420,000. Day Vision anticipates
producing 252,000 units this year.

Requirement 1:
What is the variable cost per unit? (Do not round your intermediate calculations.)

(Click to select)

Requirement 2:
What are the anticipated total costs for the year? (Do not round your intermediate calculations.)

(Click to select)

Requirement 3:
(a)If the selling price is $11.9 per unit, what is the Day Vision’s break-even quantity on a cash basis? (Do

not round your intermediate calculations.)

(Click to select)

(b)If depreciation is $151,200 per year, what is the accounting break-even quantity? (Do not round your
intermediate calculations.)

(Click to select)

rev: 09_18_2012

References

Worksheet Learning Objective: 11-03 How
to determine and interpret cash,
accounting, and financial break-
even points.

Difficulty: Basic Section: 11.3 Break-Even
Analysis

Wendy and Wayne are evaluating a project that requires an initial investment of $890,000 in fixed assets.
The project will last for fourteen years, and the assets have no salvage value. Assume that depreciation is
straight-line to zero over the life of the project.

Sales are projected at 103,000 units per year. Price per unit is $38, variable cost per unit is $26, and fixed
costs are $891,780 per year. The tax rate is 35 percent, and the required annual return on this project is 12
percent. The projections given for price, quantity, variable costs, and fixed costs are all accurate to within +/-
19 percent.

Required:
(a) Calculate the best-case NPV. (Do not round your intermediate calculations.)

(Click to select)

(b) Calculate the worst-case NPV. (Do not round your intermediate calculations.)

(Click to select)

rev: 09_18_2012

References

Worksheet Learning Objective: 11-02 How
to perform and interpret a
scenario analysis for a proposed
investment.

Difficulty: Basic Section: 11.2 Scenario and
Other What-If Analyses

Wendy and Wayne are evaluating a project that requires an initial investment of $890,000 in fixed assets.
The project will last for fourteen years, and the assets have no salvage value. Assume that depreciation is
straight-line to zero over the life of the project.

Sales are projected at 103,000 units per year. Price per unit is $38, variable cost per unit is $26, and fixed
costs are $891,780 per year. The tax rate is 35 percent, and the required annual return on this project is 12
percent. The projections given for price, quantity, variable costs, and fixed costs are all accurate to within +/-
19 percent.

Required:
(a) Calculate the best-case NPV. (Do not round your intermediate calculations.)

(Click to select)

(b) Calculate the worst-case NPV. (Do not round your intermediate calculations.)

(Click to select)

rev: 09_18_2012

References

Worksheet Learning Objective: 11-02 How
to perform and interpret a
scenario analysis for a proposed
investment.

Difficulty: Basic Section: 11.2 Scenario and
Other What-If Analyses

Wendy and Wayne are evaluating a project that requires an initial investment of $890,000 in fixed assets.
The project will last for fourteen years, and the assets have no salvage value. Assume that depreciation is
straight-line to zero over the life of the project.

Sales are projected at 103,000 units per year. Price per unit is $38, variable cost per unit is $26, and fixed
costs are $891,780 per year. The tax rate is 35 percent, and the required annual return on this project is 12
percent. The projections given for price, quantity, variable costs, and fixed costs are all accurate to within +/-
19 percent.

Required:
(a) Calculate the best-case NPV. (Do not round your intermediate calculations.)

(Click to select)

(b) Calculate the worst-case NPV. (Do not round your intermediate calculations.)

(Click to select)

rev: 09_18_2012

References

Worksheet Learning Objective: 11-02 How
to perform and interpret a
scenario analysis for a proposed
investment.

Difficulty: Basic Section: 11.2 Scenario and
Other What-If Analyses

At an output level of 31,000 units, you calculate that the degree of operating leverage is 3.00. If output rises
to 47,120 units, what will the percentage change in operating cash flow be? (Do not round your intermediate
calculations.)

rev: 09_18_2012

156.00%

102.63%

163.80%

160.68%

148.20%

References

Multiple Choice Learning Objective: 11-04 How
the degree of operating
leverage can affect the cash
flows of a project.

Difficulty: Basic Section: 11.5 Operating Leverage

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Consider each of the following projects:

Project
Accounting
Break-Even Unit Price Unit Variable Cost Fixed Costs Depreciation

Alpha 121,200 $ 40 $ 32 $ 794,000 ?
Beta 117,000 ? 44 3,400,000 $ 950,000
Zeta 6,540 111 ? 151,000 120,000

Required:
(a) Find the depreciation for Project Alpha. (Do not round your intermediate calculations.)

(Click to select)

(b) Find the unit price for Project Beta. (Do not round your intermediate calculations.)

(Click to select)

(c) Find the unit variable cost for Project Zeta. (Do not round your intermediate calculations.)

(Click to select)

rev: 09_18_2012

References

Worksheet Learning Objective: 11-03 How
to determine and interpret cash,
accounting, and financial break-
even points.

Difficulty: Basic Section: 11.4 Operating Cash
Flow, Sales Volume, and Break-
Even

Randall’s Ales & Porters S.A., is considering expanding into Costa Rica. As an incentive, Costa Rica agrees
not to charge the company any taxes. The project has the following estimated data:

price = $98 per unit
variable costs = $57.82 per unit
fixed costs = $7,400
required return = 13 percent
initial investment = $12,000
life = three years
depreciable life = three years, straight-line.

Required:
(a)What is the accounting break-even quantity? (Do not round your intermediate calculations.)

(Click to select)

(b) What is the cash break-even quantity? (Do not round your intermediate calculations.)

(Click to select)

(c) What is the financial break-even quantity? (Do not round your intermediate calculations.)

(Click to select)

(d)What is the degree of operating leverage at the financial break-even level of output? (Do not round
your intermediate calculations.)

(Click to select)

rev: 09_18_2012

References

Worksheet Learning Objective: 11-03 How
to determine and interpret cash,
accounting, and financial break-
even points.

Difficulty: Basic Section: 11.4 Operating Cash
Flow, Sales Volume, and Break-
Even

Knight Shades Inc. is considering adding new line of sunglasses to their designer series. The glasses will
sell for $1,100 per pair and have a variable cost of $400 per unit. The company has spent $84,000 for a
marketing study that estimates the company will sell 62,000 sunglasses per year for seven years.

The fixed costs each year to produce the sunglasses will be $4,200,000. The company has also spent
$630,000 on research and development for the new glasses. The new plant and equipment will cost
$12,000,000 at start-up and will be depreciated on a straight-line basis to zero over the seven years. At the
end of the seven years the plant and equipment will be worthless. The new sunglasses will also require an
increase in net working capital of $586,000 that will be returned at the end of the project. The tax rate is 37
percent, and the cost of capital is 15 percent.

The marketing study also estimates that introducing the new sunglasses will reduce sales of the company’s
high-priced sunglasses by 15,000 units. The high-priced glasses sell at $1,700 and have variable costs of
$800. The study also estimates that the company will increase sales of its cheap sunglasses by 12,000
units. The cheap sunglasses sell for $600 and have variable costs of $200 per unit.

Knight Shades Inc. estimates the project’s NPV to be $70,215,660.28, but would like to know the sensitivity
of NPV to changes in the price of the new sunglasses and the quantity of new sunglasses sold.
Note: you may want to verify the base-case NPV to make sure you’re setting up the problem correctly.

Required:
(a)What is the sensitivity of the NPV to changes in the price of the new sunglasses?

Note: In your economics classes you learned that sensitivity (elasticity) is defined as the percent change
in one variable due to a percent change in another variable. Hence, it is easiest to estimate the
sensitivity by re-calculating the NPV if price increases by 1%. (Do not round your intermediate
calculations.)

(Click to select)

(b)What is the sensitivity of the NPV to changes in the quantity sold? Calculate the sensitivity by assuming
sales increase by 1%. (Do not round your intermediate calculations.)

(Click to select)

rev: 09_18_2012, 11_12_2012

We are evaluating a project that costs $976,000, has an 15-year life, and has no salvage value. Assume
that depreciation is straight-line to zero over the life of the project. Sales are projected at 143,000 units per
year. Price per unit is $40, variable cost per unit is $25, and fixed costs are $992,592 per year. The tax rate
is 35 percent, and we require a 11 percent return on this project.

Requirement 1: Break-Even
(a) Calculate the accounting break-even point. (Do not round your intermediate calculations.)

(Click to select)

(b)What is the degree of operating leverage at the accounting break-even point? (Do not round your
intermediate calculations.)

(Click to select)

Requirement 2: Base-Case & NPV Sensitivity
(a)Calculate the base-case operating cash flow. (Do not round your intermediate calculations.)

(Click to select)

(b) Calculate the base-case NPV. (Do not round your intermediate calculations.)

(Click to select)

(c)What is the sensitivity/elasticity of NPV to changes in the sales figure?
Recall from your economics class that an elasticity measures a percentage change in one variable due
to a percentage change in another. So simply increase sales quantity by 1 percent, calculate the new
NPV, and then calculate the percentage change in the NPV. (Do not round your intermediate
calculations.)

(Click to select)

(d)Based on this sensitivity, what is the change in NPV (in dollars) if there is a 10 percent decrease in
projected sales? (Do not round your intermediate calculations.)

(Click to select)

Requirement 3: Sensitivity of OCF
(a)In addition to NPV, we can calculate the sensitivity of other things, such as OCF. What is the sensitivity of

base-case OCF to changes in the variable cost? Estimate the sensitivity by increasing variable costs by
10%. (Do not round your intermediate calculations.)

(Click to select)

(b)Based on this sensitivity, estimate the change in OCF (in dollars) given a 14% decrease in the variable
costs? (Do not round your intermediate calculations.)

(Click to select)

rev: 09_18_2012

References

Worksheet Learning Objective: 11-01 How
to perform and interpret a
sensitivity analysis for a
proposed investment.

Section: 11.4 Operating Cash Flow, Sales Volume, and Break-
Even

Difficulty: Basic Learning Objective: 11-03 How
to determine and interpret cash,
accounting, and financial break-
even points.