Your buddy comes to you with a surefire way to make some quick money and help pay off your student loans. His idea is to sell T-shirts with the words “I get” on them. “You get it?” He says, “You see all those bumper stickers and T-shirts that say ‘got milk’ or ‘got surf.’ So this says, ‘I get.’ It’s funny! All we have to do is buy a used silk screen press for $5,700 and we are in business!” Assume there are no fixed costs, and you depreciate the $5,700 in the first period. Taxes are 34 percent.
a. What is the accounting break-even point if each shirt costs $4.60 to make and you can sell them for $10.10 apiece?
Now assume one year has passed and you have sold 5,100 shirts! You find out that the Dairy Farmers of America have copyrighted the “got milk” slogan and are requiring you to pay $15,500 to continue operations. You expect this craze will last for another two years and your discount rate is 11 percent.
b. What is the financial break-even point for your enterprise now?