Chapter 7, Problem 5CQ

Summary Introduction

To discuss: Whether the project reaches accounting break-even point, cash break-even point, or financial break-even point based on the given statement.

Statement:

A firm considers a new project which needs an (initial) primary investment with sales, variable costs, and fixed costs.

Introduction:

Break-even point refers to the point where the company incurs no loss or no profit, and it indicates the required volume of sales to cover all operating expenses.

Accounting break-even point refers to the point where the company faces zero profits.

Cash break-even point occurs when minimum revenue from sales is required to fetch the business with the positive cash flows.

Financial break-even point refers to the point of earnings before interest and taxes (EBIT), which is equal to fixed financial cost inclusive of preference dividend and interest.

Summary Introduction

To discuss: The reason for the above order.

Summary Introduction

To discuss: Whether the above mentioned order is always applicable.