Question

Boise Timber Co. computes its break-even point strictly on the basis of cash expenditures related to fixed costs. Its total fixed costs are \(6,500,000, but 10 percent of this value is represented by depreciation. Its contribution margin (price minus variable cost) for each unit is \)9. 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 650,000 units.

Step-by-step solution

Depreciation

$\begin{array}{rcl}\mathrm{Depreciation}& =& 10\%\mathrm{of}\mathrm{fixed}\mathrm{cost}\\ & =& \$6,500,000\times 10\%\\ & =& \$650,000\end{array}$

Cash break even point

$\begin{array}{rcl}\mathrm{Cash}\mathrm{break}\mathrm{even}\mathrm{point}& =& \frac{\mathrm{Fixed}\mathrm{cost}-\mathrm{Depreciation}}{\left(\mathrm{Revenue}\mathrm{per}\mathrm{unit}-\mathrm{Variable}\mathrm{cost}\mathrm{per}\mathrm{unit}\right)}\\ & =& \frac{\$6,500,000-\$650,000}{\$9}\\ & =& 650,000\mathrm{units}\end{array}$