, since the interest on the debt, or debt service, is a fixed cost, there is a greater potential for loss if the venture fails. However, the interest rate on debt is nearly always less than the expected return of the equity holder, and thus the return on each invested dollar of the project. The equity holders earn a return on borrowed dollars as well as their invested dollars, in the amount of the contribution margin minus the interest rate
If the interest on new debt is lower than the interest on the debt a company is carrying, the company will either refinance or be more aggressive in prepaying debt, knowing that it can borrow again at a lower rate if need be. If the market interest rate is higher than either the current debt or the company's cost of capital, the company will not use debt to fund new projects and will not prepay debt.
The selling price X number of units = the variable cost X the number of units + 96000
U = 12,000 units at the breakeven point
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