DJ Jablonski

Individual Homework – Chapter 11

(Due Date: February 4, 2021)

Note: This is an individual assignment. While you can discuss questions with other students in
the class, you will have to finish all questions independently. You can type or handwrite your
answers. If you use Excel to work on questions, you will have to turn in your Excel files too.

See Excel File for Work

1. K-Too Everwear Corporation can manufacture mountain climbing shoes for $33.18 per pair
in variable raw material costs and $24.26 per share in variable labor expense. The shoes sell
for $170 per pair. Last year, production was 145,000 pairs. Fixed costs were $1,750,000.
What were total production costs? What is the marginal cost per pair? What is the average
cost?

$10,078,800.0
Total Production Costs 0

Marginal Cost Per Unit $57.44

Average Cost Per Unit $69.51

2. We are evaluating a project that costs $786,000, has an eight-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 65,000 units per year. Price per unit is $48, variable cost per unit is $25, and
fixed costs are $725,000 per year. The tax rate is 22%, and we require a return of 10% on this
project.
a. Calculate the accounting break-even point. What is the degree of operating leverage at
the accounting break-even point?

Accounting Break Even = 35793.48 or 35794 since no partial units

DOL = 8.3791

b. Calculate the base-case cash flow and NPV. What is the sensitivity of NPV to changes in
the quantity sold? Explain what your answer tells you about a 500-unit decrease in the
quantity sold.

Best Case OCF With Taxes = $622,215

NPV = 2,533,471

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Sensitivity of NPV = $95.71

A 500 unit decrease in quantity sold tells us that our NPV would decrease $47,854.

c. What is the sensitivity of OCF to changes in the variable cost figure? Explain what your
answer tells you about a $1 decrease in estimated variable costs.

Sensitivity of OCF = -$50,700

A 1 dollar decrease to estimated variable costs would give us a $50,700 increase to the overall
value of OCF.

3. A project has the following estimated data: Price = $62 per unit; variable costs = $28 per
unit; fixed costs = $27,300; required return = 12%; initial investment = $34,800; life = four
years. Ignoring the effect of taxes, what is the accounting break-even quantity? The cash
break-even quantity? The financial break-even quantity? What is the degree of operating
leverage at the financial break-even level of output?

Accounting Break Even = 1,059 Units

Cash Break Even = 803 Units

Financial Break Even = 1,140 Units

DOL = 3.3825

4. A proposed project has fixed costs of $89,000 per year. The operating cash flow at 10,400
units is $127,400. Ignoring the effect of taxes, what is the degree of operating leverage? If
units sold rise from 10,400 to 11,000, what will be the increase in operating cash flow? What
is the new degree of operating leverage?

DOL = 1.6986

Increase In OCF = $12,484.62

New DOL = 1.6362

5. You are considering a new product launch. The project will cost $1,950,000, have a four-year
life, and have no salvage value; depreciation is straight-line to zero. Sales are projected at
210 units per year; price per unit will be $17,500, variable cost per unit will be $10,600, and
fixed costs will be $560,000 per year. The required return on the project is 12%, and the
relevant tax rate is 21%.
a. Based on your experience, you think the unit sales, variable cost, and fixed cost projects
given here are probably accurate to within ±10% . What are the upper and lower

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 bounds for these projections? What is the base-case NPV? What are the best-case and
worst-case scenarios?

Base Case NPV = $494,109.46

Best Case NPV = $1,563,713.25

Worst Case NPV = -$468,668.32

b. Evaluate the sensitivity of your base-case NPV to changes in fixed costs.

Sensitivity of NPV with FC = 2.3995

c. What is the cash break-even level of output for this project (ignoring taxes)?

Cash Break Even = 81.16 or 82 since no partial units

d. What is the accounting break-even level of output for this project? What is the degree of
operating leverage at the accounting break-even point? How do you interpret this
number?

Accounting Break Even = 151.81 or 152 since no partial units

DOL = 2.15

For each 1% increase in unit sales, OCF will increase by 2.15%