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 $40,300, but inventory would increase by $310,000. Wisconsin Snowmobile would have to finance the extra inventory at a cost of 14.5 percent.

Determine the extra cost or savings of switching over to level production. (Input the amount as a positive value.)

How low would interest rates need to fall before level production would be feasible? (Input your answer as a percent rounded to the nearest whole number.)

Wisconsin Snowmobile Corp. is considering a switch to level production. Cost efficiencies would occur under level production, and aftertax costs would decline by $40,300, but inventory would increase by $310,000. Wisconsin Snowmobile would have to finance the extra inventory at a cost of 14.5 percent.

Explanation / Answer

A-1)

Particulars

Amount

Inventory Increase by

              310,000

Interest Cost @ 14.5%

                44,950

Particulars

Amount

Savings

              40,300

Less : Interest Cost

           (44,950)

Loss

              (4,650)

a-2)

No, As there is loss not advisable to switch over

b)

Maximum interest rate to make savings and cost equal

Inventory cost x Interest rate= Savings

310,000 x Interest rate=40,300

Interest rate=40,300/310,000

                         =13%

Interest rate 13% or less is feasible

Particulars

Amount

Inventory Increase by

              310,000

Interest Cost @ 14.5%

                44,950

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