Smith Brothers has a choice of two projects. Project A has annual fixed costs of $300,000 while project B has Annual Fixed costs of $1m. Project A has depreciation and amortization of $100,000 and project B has depreciation and amortisation of $250,000. The possible projects are for the sale of computer keyboards. These keyboards will sell for $25 each. The variable costs for project A are $15 and $7 for project B. The EBIT of project A is $400,000 and the EBITDA of Project B is $2m.

a) Calculate the Cash Flow Cross Over Level of Unit Sales (2 Marks)

Answer:Answer

b) Calculate the Accounting Cross Over Level of Unit Sales (2 Marks)

Answer:Answer

c) Calculate the Cash Flow DOL for Project A (1 Mark)

Answer:Answer

d) Calculate the Accounting DOL for Project A (1 Mark)

Answer:Answer

e) Calculate the Cash Flow DOL for Project B (1 Mark)

Answer:Answer

f) Calculate the Accounting DOL for Project B (1 Mark)

Answer:Answer

g) If the cash flow cross over level of sales for a project is 1m units and you expect to produce and sell 560,000 units, would you invest in the project with the high or low fixed costs? (2 Marks)

Answer:Answer

High

Low

Cannot Say