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:

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