Sensitivity Analysis Break Even The corporate controller ha

Sensitivity Analysis, Break Even – The corporate controller has asked you to run some numbers in helping to determine whether to launch a new product line. Initial investment is $300,000 and will establish fixed costs of $200,000. Project Life is 10 years. With a quick production ramp the plan is to hit 20,000 units pricing out at $50.00 each. With variable cost of $35.00 per unit and a 21% tax rate the required return (hurdle rate) is 15%.

How much would a 10% increase in sales at the break-even point increase operating profit?

Question 23 options:

7.6%

76.7%

10.0%

Cannot be determined.

	7.6%
	76.7%
	10.0%
	Cannot be determined.

Solution

Cannot be determined. option is cannot be determined BEP = Fixed Cost/ Sales - Variable Cost BEP = $200,000/($50 - $35) 13,333.33 Units BEP Sales = 13,333.33 x $50 $666,666.67 Income Statement Orginal BEP 10.00% Sales $1,000,000.00 $666,666.67 $733,333.33 Less: Variable cost -$700,000.00 -$466,666.67 -$513,333.33 Contribution margin $300,000.00 $200,000.00 $220,000.00 Less: Fixed Cost -$200,000.00 -$200,000.00 -$200,000.00 Net Operating Income $100,000.00 $0.00 $20,000.00 Increase in operating Profit = $20,000 - $0/$0 #DIV/0!