Breakeven Analysis and Equipment Evaluation

This assignment presents a case scenario where a company is considering changes that will impact its fixed costs and variable cost per unit. Students are tasked with recalculating the breakeven point under these new conditions and evaluating whether the changes are advisable. The assignment also delves into capital budgeting, requiring students to analyze Net Present Value (NPV) and Internal Rate of Return (IRR) for two different equipment options. Finally, students must justify their recommendation for which equipment is most suitable based on their calculations and analysis.

Assessment 1
Assessment 1
By Student’s Name
Course + Code
Class
Institution
Date

Assessment 2
Assessment
Question 1
a.
Cash receipts
Month of
July
(Amount$)
Month of
August
(Amount$)
Month of
September
(Amount$)
Fee 140,000 160,000 200,000
Profit from sales 100,000
Total cash
receipt 140,000 260,000 200,000
Expenses
Wages & salaries 70,000 70,000 70,000
Supplies 8,500 9,200 12,000
Equipment 120,000
Buying of plants 42,000 45,000 61,000
Total expenses 240,050 124,200 143,000
Net cash flow -100,500 135,800 57,000
Beginning balance 265,000 164,500 300,300
Ending balance 164,500 300,300 357,300

Assessment 3
b.
Cash
receipts
Month of
July
(Amount$
)
Month of
August
(Amount$
)
Month of
Septembe
r
(Amount$
)
Fees 140,000 160,000 200,000
Profit from sales 100,000
Total cash
receipts 140,000 260,000 200,000
Expenses
Wages & salaries 70,000 70,000 70,000
Supplies 8,500 9,200 12,000
Equipment 10,000 10,000 10,000
Buying of plants 42,000 45,000 61,000
Total expenses 130,500 134,200 153,000
Net cash flow 9,500 125,800 47,000
Beginning balance 26,500 274,500 400,300
Ending balance 274,500 400,300 447,300

Assessment 4
After the calculation, the remaining balance is more, therefore it is advisable for the owner to
rent the facility (debitoor.com, 2017).
Question 2
a. Fixed Costs ÷ (Price - Variable Costs) = Breakeven Point in Units
1-year-old
$402,800/ ($20-12) =50,350 units
2-years- old
$402,800/ (28-18) =40,280 units
3-year-old
$402,800/ (45-27) =22,377 units
Total units =50,350+40,280+22,377=113,007 units
b.
Profit = Revenue from sales - Variable costs units - Fixed costs
Profit =SPx – VCx – TFC
1-year-old
Sales revenue $ 1,007,000
Variable costs 604,200
Fixed costs 402,800
Profit $ 0

Assessment 5
2-year-old
Sales revenue $ 1,127,840
Variable costs 725,040
Fixed costs 402,800
Profit $ 0
3-year-old
Sales revenue $ 1,006,965
Variable costs 604,180
Fixed costs 402,800
Profit $ 0
(P.H. Gutierrez, 2016)
C
1-year-old
Selling price $20
Variable cost/unit 12
Total fixed costs are:
= $402,800
Cost equation: TC = 12x + 402,800
Sales in units breakeven
When determining breakeven point, the profit equation:
20.00x - 12x - 402,800 = 0
x = 50,350 units
.
Sales revenue breakeven.

Assessment 6
Sales expected to increase 50,350-22,377 =27,973.
Sales revenue
$27,973 x 50,350 units = $1,007,000
Additional units sold profit.
The contribution margin of each unit (CMU) = Selling price of each unit - Variable cost of
each unit
CMU = $20.00 - $12.00 = $8.00 per unit
Every unit sold generates an additional profit of $8.00. Therefore, if the company increases
its sells: Additional profit = 27,973 x $8.00 = $223,784
Additional sales revenue profit.
The contribution margin ratio CMR = Contribution margin of each unit / Selling price of each
unit
CMR = ($20.00 - $12.00) / $20.00 = 40.00%
Each sales dollar generates about 40 cents of additional profit. Hence, increase in profit of
$50,000 of additional sales revenue is generated is:
Additional profit = 40.00% x $50,000 = $20000
Case scenario.
Total fixed costs are expected to increase by 40%, the new fixed costs will be (100% + 40%)
times the original fixed costs. The variable cost per unit will be $8.00 per unit.
The new profit is = 20.00x - [12]x - [(100% + 40%) x 402,800] = 0
x = 50,367.50 units = 50,368 units
Comparing 50,368 units which is the new breakeven point with 50,350 units the original
breakeven units, I cannot recommend that company makes the changes. This is because it is
easier to sell 50,350 units than to sell 50,368 units (P.H. Gutierrez, 2016).
Question 3
a. Before making a major purchase the owner of the company should also understand Net
Present Value and Payback Period of the equipment.
Net Present Value is an effective and efficient tool, this is because it utilizes the analysed
discounted cash flow, whereby there is a reduction in the future cash flows at a discount rate
to reimburse future cash flows uncertainty (Magni, 2009).
Payback Period is a simple and key decision tool; this method will enable the company owner
to determine the period required to repay the initial investment needed to purchase the
equipment.

Assessment 7
b. Because it is important for me as the owner to also establish the NPV of each equipment
(Juhász, 2011). IRR cannot be fully relied on since the method makes heroic and inaccurate
reinvestment assumptions, whereby all the short-term cash flows are presumed to be
reinvented at the IRR rate. ARR also cannot be depended on because it does not consider
time value of money (Juhász, 2011). Therefore, when making a purchase decision NPV
approach is adequately good enough for investment assessment for alternative projects.
c. Equipment A is appropriate in this case because it has a higher ARR (Juhász, 2011). IRR
approach cannot be relied on when choosing mutually exclusive projects.

Assessment 8
References
debitoor.com, 2017. Cash budget - What is a cash budget?. [Online]
Available at: https://debitoor.com/dictionary/cash-budget
[Accessed 9 9 2017].
Juhász, L., 2011. Net Present Value Versus Internal Rate of Return. Recent Issues in
Economic Development, 4(1), pp. 46-53.
Magni, C. A., 2009. Accounting and economic measures: An integrated theory of capital
budgeting. [Online]
Available at:
https://www.researchgate.net/publication/46461039_Accounting_and_Economic_Measures_
An_Integrated_Theory_of_Capital_Budgeting
[Accessed 9 9 2017].
P.H. Gutierrez, a. N. D., 2016. Break-Even Method of Investment Analysis, Colorado:
Colorado State University.