3 Original price per unit Fixed costs S Number of units produced and sold annually $95,000 $2,000,000 6 Total annual profits 7 Firm's total assets 8 % of assets equity financed 9 Change in production process: 10 Additional investment 11 Additional fixed costs 12 Reduction in variable cost per unit 13 Increase in units of output 14 Price to sell all units 15 Tax rate 16 Cost of equity 17 % of debt used 18 19 Calculate incremental profit: 20 Step 1: Determine current variable cost per unit, V 21 Step 2: Determine new profit level if production process changed 22 Step 3: Calculate incremental profit 23 Approximate rate of return on new investment 24 Should the firm make the investment? 25 26 Calculate break-even point 27 Original break-even point, QBE Old 28 New break-even point, QBE Now 29 What happens to the break-even point? 30 31 Determination of more/less exposure to business risk: 32 Does the break-even point increase? 33 34 Percentage of Fixed Costs to Total Costs: 35 Original production process 36 New production process 37 Does the percentage of fixed costs increase? 38 39 Do your responses suggest that the new production process is more risky? 40 14 50 $600,000 $5,000,000 100% $3,500,000 $470,000 $11,000 22 $84,000 0% 14.00% 0% Formulas #N/A #N/A #N/A #N/A #N/A #N/A #N/A #N/A #N/A #N/A #N/A #N/A #N/A