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Wiley Question –

Please take a look at the question below and the associated answer:

Question:

A company has $450,000 per year of fixed production costs, of which $150,000 are non-cash outlays. The variable cost per unit is $15, and the unit selling price is $25. The breakeven volume in sales units for this company would be

18,000 units.

60,000 units.

45,000 units.

30,000 units.

Answer: 45,000 units.

The breakeven volume is calculated as follows:

Breakeven volume = Fixed costs ÷ (Price – Unit variable costs)

450,000 ÷ ($25 – $15)

450,000 ÷ ($10) = 45,000 units

My question:

Wouldn’t the $150,000 non cash outlay be subtracted from the Fixed Costs thereby making the answer = 30,000 units?

It was my understanding that the non-cash outlay items (depreciation, amortization, etc.) would be subtracted from the fixed costs (numerator) when determining the break even point.

Please let me know your thoughts.

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[acamp]

Without getting too far into it, I'd imagine this is asking break even under GAAP–which is not cash basis. So break even for financial reporting is when net income is zero. You're answer would be the breakeven cash flows.

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