Schweser Satellites Inc. produces satellite earth stations that sell for $95,000

Question

Schweser Satellites Inc. produces satellite earth stations that sell for $95,000 each. The firm's fixed costs, F, are $2.5 million, 50 earth stations are produced and sold each year, profits total $600,000; and the firm's assets (all equity financed) are $6 million. The firm estimates that it can change its production process, adding $3 million to investment and $560,000 to fixed operating costs. This change will (1) reduce variable costs per unit by $7,000 and (2) increase output by 24 units, but (3) the sales price on all units will have to be lowered to $87,000 to permit sales of the additional output. The firm has tax loss carryforwards that render its tax rate zero, its cost of equity is 12%, and it uses no debt.

What is the incremental profit?
$  
To get a rough idea of the project's profitability, what is the project's expected rate of return for the next year (defined as the incremental profit divided by the investment)? Round your answer to two decimal places.
%
Should the firm make the investment? Yes or No

Would the firm's break-even point increase or decrease if it made the change?
-Select-The change would increase the break-even point.The change would decrease the break-even point.Item 4

Would the new situation expose the firm to more or less business risk than the old one?
-Select-IIIIIIItem 5
I. It is impossible to state unequivocally whether the new situation would have more or less business risk than the old one.
II. The new situation would obviously have more business risk than the old one.
III. The new situation would obviously have less business risk than the old one.

Explanation / Answer

Answer:

Calculation of increase /(Decrease) in net income

Current

Exepcted

Output

50

74

Revenue

4750000

6438000

(50*95000)

(74*87000)

Variable cost

1650000

1924000

(50*33000)

(74*(33000-7000)

Fixed costs

2500000

3060000

(2500000+560000)

Net Profit

600000

1454000

Ans-1

Incremetal net profit (A)

854000

Invetsment ' (B)

3000000

Ans-2

Expected rate of return =A/B

28.47%

Ans-3

Yes the firm should make the investment as it would increase net income

Ans-4

Calculation of breakeven Points

Current

Exepcted

Sales Price

95000

87000

Less :Variable cost per unit

33000

26000

Contribution Per unit (A)

62000

61000

Total Fixed cost (B)

2500000

3060000

Break even units =A/B

                          40

                              50

Break even Sales ($)

$ 3,830,645.16

$      4,364,262.30

Hence Breakeven shall increase

Calculation of increase /(Decrease) in net income

Current

Exepcted

Output

50

74

Revenue

4750000

6438000

(50*95000)

(74*87000)

Variable cost

1650000

1924000

(50*33000)

(74*(33000-7000)

Fixed costs

2500000

3060000

(2500000+560000)

Net Profit

600000

1454000

Ans-1

Incremetal net profit (A)

854000

Invetsment ' (B)

3000000

Ans-2

Expected rate of return =A/B

28.47%

Ans-3

Yes the firm should make the investment as it would increase net income

Ans-4

Calculation of breakeven Points

Current

Exepcted

Sales Price

95000

87000

Less :Variable cost per unit

33000

26000

Contribution Per unit (A)

62000

61000

Total Fixed cost (B)

2500000

3060000

Break even units =A/B

                          40

                              50

Break even Sales ($)

$ 3,830,645.16

$      4,364,262.30

Hence Breakeven shall increase

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