Figure 114

P = Selling price per unit v = Variable cost per unit

Q = Total units sold

FC = Fixed costs

D = Depreciation

Project net income is given by:

Net income = (Sales - Variable costs - Fixed costs - Depreciation) X (1 - T) = (S - VC - FC - D) X (1 - T)

From here, it is not difficult to calculate the break-even point. If we set this net income equal to zero, we get:

Ross et al.: Fundamentals I IV. Capital Budgeting I 11. Project Analysis and I I © The McGraw-Hill of Corporate Finance, Sixth Evaluation Companies, 2002

Edition, Alternate Edition

362 PART FOUR Capital Budgeting

As we have seen, this says that when net income is zero, so is pretax income. If we recall that S = P x Q and VC = v x Q, then we can rearrange the equation to solve for the break-even level:

S - VC = FC + D P X Q - v X Q = FC + D (P - v) X Q = FC + D

This is the same result we described earlier.

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