Question
E12-23. Time-Adjusted Cost-Volume-Profit Analysis. Boardwalk Treat Shop is considering the desirability of producing a new chocolate candy called Pleasure Bombs. Before purchasing the new equipment
E12-23. Time-Adjusted Cost-Volume-Profit Analysis.
Boardwalk Treat Shop is considering the desirability of producing a new chocolate candy called Pleasure Bombs. Before purchasing the new equipment required to manufacture Pleasure Bombs, Marty Dey, the shops proprietor performed the following analysis:
Unit selling price .........................................................$1.45
Variable manufacturing and selling costs .....................................(1.15)
Unit contribution margin .................................................$0.30
Annual fixed costs
Depreciation (straight-line for 4 years) ......................................$15,000
Other (all cash).........................................................30,000
Total .................................................................$45,000
Annual break-even sales volume =$45,000 /$0.30 =150,000 units
Because the expected annual sales volume is 160,000 units, Dey decided to undertake the production of Pleasure Bombs. This required an immediate investment of $60,000 in equipment that has a life of four years and no salvage value. After four years, the production of Pleasure Bombs will be discontinued.
Required
a. Evaluate the analysis performed by Dey.
b. If Boardwalk Treat Shop has a time value of money of 12 percent, should it make the investment with projected annual sales of 160,000 units?
c. Considering the time value of money, what annual unit sales volume is required to break-even?
Please, show calculations
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