Question

Calloway Cab Company determines its break-even strictly on the basis of cash expenditures related to fixed costs. Its total fixed costs are \(450,000, but 5 percent of this value is represented by depreciation. Its contribution margin (price minus variable cost) for each unit is \)4.10. How many units does the firm need to sell to reach the cash break-even point?

Short answer

The cash break even point of the company is 104,268 units.

Step-by-step solution

Depreciation

$\begin{array}{rcl}\mathrm{Depreciation}& =& 5\%\mathrm{of}\mathrm{fixed}\mathrm{cost}\\ & =& \$450,000\times 5\%\\ & =& \$22,500\end{array}$

Cash break even point

$\begin{array}{rcl}\mathrm{Cash}\mathrm{break}\mathrm{even}\mathrm{point}& =& \frac{\mathrm{Fixed}\mathrm{cost}-\mathrm{Depreciation}}{\left(\mathrm{Revenue}\mathrm{per}\mathrm{unit}-\mathrm{Variable}\mathrm{cost}\mathrm{per}\mathrm{unit}\right)}\\ & =& \frac{\$450,000-\$22,500}{\$4.10}\\ & =& 104,268\mathrm{units}\end{array}$