Automatic Transmissions, Inc., has the following estimates for its new gear asse

Question

Automatic Transmissions, Inc., has the following estimates for its new gear assembly project: price = $1,190 per unit; variable cost = $410 per unit; fixed costs = $4.92 million; quantity = 82,000 units. Suppose the company believes all of its estimates are accurate only to within

Automatic Transmissions, Inc., has the following estimates for its new gear assembly project: price = $1,190 per unit; variable cost = $410 per unit; fixed costs = $4.92 million; quantity = 82,000 units. Suppose the company believes all of its estimates are accurate only to within

Explanation / Answer

Working Notes:

1) For Best Case: The number of units sold and the unit selling price have been assumed to be the best possible one for the company and hence both have been increased by 20% of the base case over and above the Base case figures. The cost elements have assumed to be decreased by 20% from the respective base case figures

2) For the Worst Case, the Cost elements have been increased by 20% over and above the Base case figures and the unit selling price and the number of units sold have been decreased by 20% from the respective base case figures

3) As fixed cost of $49,20,000 is also an estimate, the change has also been made in the fixed cost, as the project has not yet been undertaken by the company and it is just doing a scenario analysis before taking the project.

Scenario Unit Sales Calculation Unit Price ($) Calculation Unit Variable cost ($) Calculation Fixed cost ($) Calculation Base Case 82,000 1,190 410 49,20,000 Best Case 98,400 1.20*82000 1,428 1.20*1190 328 0.80*410 39,36,000 0.80*4920000 Worst Case 65,600 0.80*82000 952 0.80*1190 492 1.20*410 59,04,000 1.20*4920000

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