Tusa Waesu produces Cake stands that can be sold for K80 each. Non-depreciation fixed costs are K1,000 per year and variable costs are K60 per unit.
Required:
a. If the project requires an initial investment of K3,000 and is expected to last for 5 years and the firm pays no taxes, what are the accounting and NPV break-even levels of sales? The initial investment will be depreciated straight-line over 5 years to a final value of zero, and the discount rate is 10 percent.
b. How do your answers change if the firm’s tax rate is 40 percent?
c. What is the degree of operating leverage of Tusa Waesu when sales are K8,000?
d. What is the degree of operating leverage when sales are K10,000?
e. Why is operating leverage different at these two levels of sales?