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Answer:
Case 1 Accounting break-even point = 13,861 units
Case 1 Cash break-even point = 11,286 units
Case 2 Accounting break-even point = 20,000 units
Case 2 Cash break-even point = 11,875 units
Case 3 Accounting break-even point = 225 units
Case 3 Cash break-even point = 138 units
Explanation:
Break even point refers to the point or sales unit where total cost is equal to total revenue. That is, both total revenue and total cost at the point are even and there neither profit nor loss.
Break even point can be computed for accounting break even and the cash break even points. The difference between the two is that accounting break even point include depreciation in the fixed cost while the cash break even point deduct non cash expenses from the fixed cost. The formula for the are as follows:
Accounting break even point = Fixed cost / (Unit price - Unit cost)
Cash break even point = (Fixed cost - Depreciation) / (Unit price - Unit cost)
Using the two formula for this question, we have:
Case 1 Accounting break even point = $7,000,000 / ($2,800 - $2,295) = $7,000,000 / $505 = 13,861 units
Case 1 Cash break even point = ($7,000,000 - $1,250,000) / ($2,800 - $2,295) = $5,750,000 / $505 = 11,286 units
Case 2 Accounting break even point = $160,000 / (51 - 43) = $160,000 / $8 = 20,000 units
Case 2 Cash break even point = ($160,000 - $65,000) / (51 - 43) = $95,000 / $8 = 11,875 units
Case 3 Accounting break even point = $1,800 / (12 - 4) = $1,800 / $8 = 225 units
Case 3 Cash break even point = ($1,800 - $700) / (12 - 4) = $1,100 / $8 = 138 units
