Your company produces precious stones. Each stone sells for $100. The material cost for each stone is $30.00, while fixed costs each year for factory upkeep and administrative expenses come to $200,000. The machinery, which costs $1,000,000, is depreciated straight line over 10 years to a salvage value of zero.
a. What is the accounting break-even level of sales in terms of number of units sold? Explain what you are doing!
b. What is the NPV break-even level of sales assuming a tax rate of 35%, a 10-year project life and a discount rate of 12%? Explain what you are doing!
c. Compare the sales levels worked out above at (a) and (b), and comment on their differences, if any.