Use the Figure for the Question(s)below

question 2

Multiple Choice

Use the figure for the question(s) below.
-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 (SG&A) 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)Yes, since a positive EBIT ensures that the project will have a positive net present value (NP
• V).
• B)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.
• C)Yes, since if the estimates for each parameter are correct, the EBIT will be positive.
• D)It cannot be determined whether the decision was correct, since other factors contributing to the project's net present value (NP
• V), such as the upfront investment, have not been included in the analysis.

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Definitions:

Cost-Plus Pricing

A pricing approach that involves adding a consistent percentage or fixed sum to the production cost of a product or service to set its sale price.

Absorption Cost

A costing method that includes all manufacturing costs - direct materials, direct labor, and both variable and fixed manufacturing overhead - in the cost of a product.

Return On Investment

A performance measure used to evaluate the efficiency or profitability of an investment, calculated by dividing the profit from an investment by the cost of the investment.

Price Per Unit

Price per unit describes the cost of a single unit of product or service, providing a basis for evaluating and comparing the value of similar items.