question archive Dime a Dozen Diamonds makes synthetic diamonds by treating carbon
Dime a Dozen Diamonds makes synthetic diamonds by treating carbon
Subject:AccountingPrice:4.87 Bought7
Dime a Dozen Diamonds makes synthetic diamonds by treating carbon. Each diamond can be sold for $100. The materials cost for a standard diamond is $50. The fixed costs incurred each year for factory upkeep and administrative expenses are $205,000. The machinery costs $1.6 million and is depreciated straight-line over 10 years to a salvage value of zero.
a. What is the accounting break-even level of sales in terms of number of diamonds sold? (Do not round intermediate calculation
b. What is the NPV break-even level of diamonds sold per year assuming a tax rate of 30%, a 10-year project life, and a discount rate of 10%? (Do not round intermediate calculations. Round your answer to the nearest whole number.)
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Answer:
a.
Accounting break-even= (Annual Fixed costs + Annual Depreciation) / (Sales price – Variable cost per unit)
= (205000+(1600000/10)) / (100-50) = 7300 diamonds
b.
For the NPV to break even, the present value of the operating cash flows must be equal to initial investment.
OCF*PVAF(10%, 10years) = 1600000
OCF = 1600000/6.1446 = 260,392.63
Now: OCF = [(Revenue – Expenses) × (1 – Tax)] + (Depreciation × Tax rate)
260392.63 = ((Qty*(100-50)-205000)*(1-0.30)) + ((1600000/10)*0.30)
Qty = 10168.36, thus 10,168 diamonds.
