Managerial Finance And Team Assignment

Principles of Managerial Finance

Break even analysis. Barry Carter is considering opening a music store. He wants to estimate the number of CDs he must sell to break even. The CDs will be sold for \$13. 98 each, variable operating costs are \$10. 48 per CD, and annual fixed operating costs are \$73,500.

• Find the operating breakeven point in number of CDs. Q= FC / P- VC Q= 73,500 / 13. 98 – 10. 48 Q= 21,000 CDs B) Calculate the total operating costs at the breakeven volume found in part a.

If Barry estimates that at a minimum he can sell 2,000 CDs per month, should he go into the music business? 2,000 CDs per month x 12 months = 24,000 CDs. Since the operating breakeven point in number of CDs is 21,000, this means that Barry will sell 3,000 more CDs that will be a profit. Depending on Barry’s outcome of the music store, if he were to go into the music business and sell 2,000 CDs a month, he would make a profit. The profit would not be that much more above the operating breakeven point; however, it will still be a profit. I would take the chance and go into the music business.

The lessee will exercise its option to purchase the asset for \$24,000 at termination of the lease. Purchase If the firm purchases the machine, its cost of \$80,000 will be financed with a 5-year, 14% loan requiring equal end-of-year payments of \$23,302. The machine will be depreciated under MACRS using a 5-year recovery period. The firm will pay \$2,000 per year for a service contract that covers all maintenance costs; insurance and other costs will be borne by the firm.

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