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

Question

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) 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.

Answer 1

Answer: D