Wisconsin Snowmobile Corp. is considering a switch to level production. Cost eff

Question

Wisconsin Snowmobile Corp. is considering a switch to level production. Cost efficiencies would occur under level production, and aftertax costs would decline by $36,900, but inventory costs would increase by $410,000. Wisconsin Snowmobile would have to finance the extra inventory at a cost of 10.5 percent. (a-1) Determine the extra cost or savings of switch over to level production. (Input the amount as positive value. Omit the "$" sign in your response.) $ (a-2) Should the company go ahead and switch to level production? Yes No (b) How low would interest rates need to fall before level production would be feasible? (Omit the "%" sign in your response.) Interest rate %

Explanation / Answer

a)
Cost savings---------------36,900
Less:Increased Costs-----43,050
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Loss==================-$6,150
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No. The company should not switch to level production.
b)
Interest rates would need to fall to:10.5% or less for the switch to be feasible
However, the decision is more complicated because it depends on expectations for interest rates. If the inventory were considered permanent current assets and was financed by locking in long-term interest 10.5%, then it would make sense to switch. However, given that short-term rates are volatile; this decision made on a dip in short-term interest rates below 10.5%

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