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A company generates $5,000,000 in sales (1,000,000 units sold at a price of $5 per unit). Its variable costs equal 80 percent of sales ($4 per unit), its fixed costs are $500,000, its interest expense is equal to $100,000, its tax rate is equal to 40%, and it has 2,000,000 shares of common stock outstanding. The firm is considering a new type of machine for its existing production lines. With the new machine, fixed costs would increase to $600,000, but variable costs would decrease to $3 per unit and interest expense would increase to $150,000. One key benefit is that the company can then lower its price by $0.50 per unit (that is, a price of $4.50 per unit), and this would likely double its sales to 2,000,000 units. What are the EBIT breakeven volume and the Net Income breakeven volume if they change from the existing machine to the new machine? (Sample income statements are provided below as an aid. You are not required to use them.) Current Units Sales Variable Costs Fixed Costs EBIT Interest EBT Taxes (40%) Net Income EBIT Breakeven NI Breakeven 1,000,000.00 $5,000,000.00 -$4,000,000.00 -$500,000.00 New Units Sales Variable Costs Fixed Costs $500,000.00 EBIT -$100,000.00 Interest $400,000.00 -$160,000.00 $240,000.00 EBT Taxes (40%) Net Income EBIT Breakeven NI Breakeven 2,000,000.00 $9,000,000.00 -$6,000,000.00 -$600,000.00 $2,400,000.00 -$150,000.00 $2,250,000.00 -$900,000.00 $1,350,000.00 EBIT Breakeven = 480,000 units and NI Breakeven = 540,000 units

A company generates $5,000,000 in sales (1,000,000 units sold at a price of $5 per unit). Its variable costs equal 80 percent of sales ($4 per unit), its fixed costs are $500,000, its interest expense is equal to $100,000, its tax rate is equal to 40%, and it has 2,000,000 shares of common stock outstanding. The firm is considering a new type of machine for its existing production lines. With the new machine, fixed costs would increase to $600,000, but variable costs would decrease to $3 per unit and interest expense would increase to $150,000. One key benefit is that the company can then lower its price by $0.50 per unit (that is, a price of $4.50 per unit), and this would likely double its sales to 2,000,000 units. What are the EBIT breakeven volume and the Net Income breakeven volume if they change from the existing machine to the new machine? (Sample income statements are provided below as an aid. You are not required to use them.) Current Units Sales Variable Costs Fixed Costs EBIT Interest EBT Taxes (40%) Net Income EBIT Breakeven NI Breakeven 1,000,000.00 $5,000,000.00 -$4,000,000.00 -$500,000.00 New Units Sales Variable Costs Fixed Costs $500,000.00 EBIT -$100,000.00 Interest $400,000.00 -$160,000.00 $240,000.00 EBT Taxes (40%) Net Income EBIT Breakeven NI Breakeven 2,000,000.00 $9,000,000.00 -$6,000,000.00 -$600,000.00 $2,400,000.00 -$150,000.00 $2,250,000.00 -$900,000.00 $1,350,000.00 EBIT Breakeven = 480,000 units and NI Breakeven = 540,000 units

EBK CONTEMPORARY FINANCIAL MANAGEMENT
EBK CONTEMPORARY FINANCIAL MANAGEMENT
14th Edition
ISBN:9781337514835
Author:MOYER
Publisher:MOYER
Chapter14: Capital Structure Management In Practice
Section: Chapter Questions
Problem 1P
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but variable costs would decrease to $3 per unit and interest expense would increase to $150.000. One key benefit is that the company can then lower its price by $0.50 per unit (that is, a price of $4.50 per unit), and this would likely double its sales to 2,000,000 units. What are the EBIT breakeven volume and the Net Income breakeven volume if they change from the existing machine to the new machine? (Sample income statements are provided below as an aid. You are not required to use them.) Current Units Sales Variable Costs Fixed Costs EBIT Interest EBT Taxes (40%) Net Income EBIT Breakeven NI Breakeven New 1,000,000.00 Units $5,000,000.00 Sales -$4,000,000.00 Variable Costs -$500,000.00 Fixed Costs $500,000.00 EBIT -$100,000.00 Interest $400,000.00 -$160,000.00 $240,000.00 EBT Taxes (40%) Net Income EBIT Breakeven NI Breakeven 2,000,000.00 $9,000,000.00 -$6,000,000.00 -$600,000.00 $2,400,000.00 -$150,000.00 $2,250,000.00 -$900,000.00 $1,350,000.00 OEBIT Breakeven = 480.000 units and NI Breakeven = 540,000 units EBIT Breakeven = 420,000 units and NI Breakeven = 510,000 units EBIT Breakeven = 440,000 units and NI Breakeven = 520,000 units O EBIT Breakeven = 460,000 units and NI Breakeven = 530,000 units O EBIT Breakeven = 400,000 units and NI Breakeven = 500,000 units
Transcribed Image Text:but variable costs would decrease to $3 per unit and interest expense would increase to $150.000. One key benefit is that the company can then lower its price by $0.50 per unit (that is, a price of $4.50 per unit), and this would likely double its sales to 2,000,000 units. What are the EBIT breakeven volume and the Net Income breakeven volume if they change from the existing machine to the new machine? (Sample income statements are provided below as an aid. You are not required to use them.) Current Units Sales Variable Costs Fixed Costs EBIT Interest EBT Taxes (40%) Net Income EBIT Breakeven NI Breakeven New 1,000,000.00 Units $5,000,000.00 Sales -$4,000,000.00 Variable Costs -$500,000.00 Fixed Costs $500,000.00 EBIT -$100,000.00 Interest $400,000.00 -$160,000.00 $240,000.00 EBT Taxes (40%) Net Income EBIT Breakeven NI Breakeven 2,000,000.00 $9,000,000.00 -$6,000,000.00 -$600,000.00 $2,400,000.00 -$150,000.00 $2,250,000.00 -$900,000.00 $1,350,000.00 OEBIT Breakeven = 480.000 units and NI Breakeven = 540,000 units EBIT Breakeven = 420,000 units and NI Breakeven = 510,000 units EBIT Breakeven = 440,000 units and NI Breakeven = 520,000 units O EBIT Breakeven = 460,000 units and NI Breakeven = 530,000 units O EBIT Breakeven = 400,000 units and NI Breakeven = 500,000 units
A company generates $5,000,000 in sales (1,000,000 units sold at a price of $5 per unit). Its variable costs equal 80 percent of sales ($4 per unit), its fixed costs are $500,000, its interest expense is equal to $100,000, its tax rate is equal to 40%, and it has 2,000,000 shares of common stock outstanding. The firm is considering a new type of machine for its existing production lines. With the new machine, fixed costs would increase to $600,000, but variable costs would decrease to $3 per unit and interest expense would increase to $150,000. One key benefit is that the company can then lower its price by $0.50 per unit (that is, a price of $4.50 per unit), and this would likely double its sales to 2,000,000 units. What are the EBIT breakeven volume and the Net Income breakeven volume if they change from the existing machine to the new machine? (Sample income statements are provided below as an aid. You are not required to use them.) Current Units Sales Variable Costs Fixed Costs EBIT Interest EBT Taxes (40%) Net Income EBIT Breakeven NI Breakeven 1,000,000.00 $5,000,000.00 -$4,000,000.00 -$500,000.00 $500,000.00 -$100,000.00 $400,000.00 -$160,000.00 $240,000.00 New Units Sales Variable Costs Fixed Costs EBIT Interest EBT Taxes (40%) Net Income EBIT Breakeven NI Breakeven 2,000,000.00 $9,000,000.00 -$6,000,000.00 -$600,000.00 $2,400,000.00 -$150,000.00 $2,250,000.00 -$900,000.00 $1,350,000.00 EBIT Breakeven = 480,000 units and NI Breakeven = 540,000 units
Transcribed Image Text:A company generates $5,000,000 in sales (1,000,000 units sold at a price of $5 per unit). Its variable costs equal 80 percent of sales ($4 per unit), its fixed costs are $500,000, its interest expense is equal to $100,000, its tax rate is equal to 40%, and it has 2,000,000 shares of common stock outstanding. The firm is considering a new type of machine for its existing production lines. With the new machine, fixed costs would increase to $600,000, but variable costs would decrease to $3 per unit and interest expense would increase to $150,000. One key benefit is that the company can then lower its price by $0.50 per unit (that is, a price of $4.50 per unit), and this would likely double its sales to 2,000,000 units. What are the EBIT breakeven volume and the Net Income breakeven volume if they change from the existing machine to the new machine? (Sample income statements are provided below as an aid. You are not required to use them.) Current Units Sales Variable Costs Fixed Costs EBIT Interest EBT Taxes (40%) Net Income EBIT Breakeven NI Breakeven 1,000,000.00 $5,000,000.00 -$4,000,000.00 -$500,000.00 $500,000.00 -$100,000.00 $400,000.00 -$160,000.00 $240,000.00 New Units Sales Variable Costs Fixed Costs EBIT Interest EBT Taxes (40%) Net Income EBIT Breakeven NI Breakeven 2,000,000.00 $9,000,000.00 -$6,000,000.00 -$600,000.00 $2,400,000.00 -$150,000.00 $2,250,000.00 -$900,000.00 $1,350,000.00 EBIT Breakeven = 480,000 units and NI Breakeven = 540,000 units
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