A Maker of Kitchenware Is Planning on Selling a New

question 24

Multiple Choice

A maker of kitchenware is planning on selling a new chef-quality kitchen knife.The manufacturer expects to sell 1.6 million knives at a price of $120 each.These knives cost $80 each to produce.Selling,general,and administrative expenses are $500,000.The machinery required to produce the knives cost $1.4 million,depreciated by straight-line depreciation over five years.The maker determines that the EBIT break-even point for units sold and sale price is less than these estimates and that the EBIT break-even point for costs per unit,SG&A,and depreciation are greater than these estimates,so decides to go ahead with manufacturing the knife.Was this the correct decision?

• A)No,since the cost per unit should be greater than the EBIT-break even point for cost of goods if the project is to have a positive EBIT.
• B)Yes,since if the estimates for each parameter are correct,the EBIT will be positive.
• C)Yes,since a positive EBIT ensures that the project will have a positive net present value (NPV).
• D)No,since NPV will be negative.
• E)It cannot be determined whether the decision was correct,since other factors contributing to the project's net present value (NPV),such as the upfront investment,have not been included in the analysis.

---

Definitions:

Glazier

A glassworker.

Cames

Thin metal strips, traditionally lead, used to join pieces of glass together in the creation of stained glass windows and art.

Optical Isolator Circuit

A component that uses light to transfer an electrical signal between two isolated circuits, preventing high voltages from affecting the system receiving the signal.

Line Voltage Transients

Short-duration surges, spikes, or dips in electrical power supply voltage, which can damage equipment or affect performance.