Doug Robinson Is Considering the Possibility of Opening His Own

question 40

Essay

Doug Robinson is considering the possibility of opening his own manufacturing facility. He expects first-year sales to be $800,000, and he feels that his variable costs will be approximately 40% of sales. His fixed costs in the first year will be $200,000.
Doug is considering two ways of financing the firm: (a) 40% equity financing and 60% debt at 10%, or (b) 100% equity financing. He can sell common stock to his relatives for $10 per share. Either way, he will need to raise $1,000,000. Compute his break-even point in dollars.

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Definitions:

Fewest Assumptions

A principle suggesting that the simplest explanation, requiring the least speculative assumptions, is often the most accurate.

Casual Observation

An informal method of gathering data or evidence without a structured framework or hypothesis in mind.

Critical Thinking

The objective analysis and evaluation of an issue in order to form a judgment, characterized by open-mindedness, skepticism, and an analytical approach.

Gut Feelings

Intuitive judgments and responses that are not the result of conscious reasoning.