The Adept Co. is analyzing a proposed project. The company expects to sell 2,500
ID: 2641883 • Letter: T
Question
The Adept Co. is analyzing a proposed project. The company expects to sell 2,500 units, give or take
10%. The expected variable cost per unit is $8 and the expected fixed costs are $12,500. Cost estimates
are considered accurate within a plus or minus 5% range. The depreciation expense is $4,000. The
sale price is estimated at $16 a unit, give or take 2%. The company bases its sensitivity analysis on the
expected case scenario.
The company is conducting a sensitivity analysis on the sales price using a sales price estimate of $17.
Using this value, the earnings before interest and taxes will be:
A. $4,000
B. $6,000
C. $8,500
D. $10,000
E. $18,500
The company conducts a sensitivity analysis using a variable cost of $9. The total variable cost estimate
will be:
A. $21,375
B. $22,500
C. $23,625
D. $24,125
E. $24,750
Please show me the steps.
Explanation / Answer
Sensitivity Analysis is one of the financial management tools.Sensitivity analysis is a way to predict the outcome of a decision if a situation turns out to be different compared to the key prediction. It is very worthwhile, when prices of one or more variables is varies over particular time periods.
As per question(given),
(a) Expected Sale units = 2,500 units (it is 10% move up or down in the period)
(b) Expected Variable costs per unit is $ 8.00 and total fixed costs = $ 12,500 ( it is 5% range moved up or down )
(c) Depreciation expenses = $ 4,000
(d) Sale price = $ 16.00 ( it is moved 2% up or down)
(i) Computation of earnings before interest and taxes. We have,
Step1: Contribution per unit = Sale price per unit - Variable cost per unit
Contribution per unit = 17.00 - 8.00 = $ 9.00
Step2: Total contribution = Contribution per unit x total units sale
Total Contribution = 9 x 2,500 = $ 22,500.00
Step3: Gross profit = Total Contribution - Total Fixed Cost
Gross profit = 22,500 - 12,500 = $ 10,000.00
Step4: Earning before interest and taxes = Gross Profit - Depreciation expenses
Earning before interest and taxes =10,000 - 4,000 = $ 6,000.00
Hence, Earning before interest and taxes is $ 6,000.00
Answer: B. $ 6,000.00
(ii) Computation of total variable cost using sensitivity analysis.we have ,
Expected variable cost per unit = $ 9.00
Expected Unit sale = 2,500 units
Total Varible cost = Expected unit sale x Expected variable cost per unit
Total Variable Cost = 2,500 x 9.00
Total Variable Cost = $ 22,500.00
Hence Total Variable Cost = $ 22,500.00
Answer: (B) $ 22,500
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