9 – #20
Your buddy comes to you with a sure fire way to make some quick money and help pay off your student loans. His idea is to sell T-shirts with words “I get” on them, “You get it?” He says, “You see all those bumper stickers and T-shirts that say, ‘got milk’ or ‘got surf’. So this says, ‘I get.’ It’s funny! All we have to do is buy a used silk screen press for $3,500 and we are in business!” Assume there are no fixed costs, and you depreciate the $3,500 in the first period. Further, taxes are 30%.
a. What is the accounting break-even point if each shirt costs $6.50 to make and you can sell them for $13.00 apiece?
Now assume one year passed and you have sold 5,000 shirts! You find out that the Dairy Farmers of America have copyrighted the “got milk” slogan and are required you to pay $15,000 to continue operations. You expect the craze will last for another three years and that your discount rate is 12%.
b. What is the financial break-even point for your enterprise now?