Question

Wisconsin Snowmobile Corp. is considering a switch to level production. Cost efficiencies would occur under level production, and aftertax costs would decline by $36,000, but inventory would increase by $300,000. Wisconsin Snowmobile would have to finance the extra inventory at a cost of 13.5 percent a-1. Determine the extra cost or savings of switching over to level production. 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? (Input your answer as a percent rounded to the nearest whole number.) Interest rate

Answer 1

a. The extra cost or savings of switching over to level production is computed as shown below:

Increased cost is computed as follows:

= Inventory increase x Interest expense

= $ 300,000 x 13.5%

= $ 40,500

Savings = $ 36,000

So,

= Savings - Increased cost

= $ 36,000 - $ 40,500

= - $ 4,500

a-2. The company shall not switch to level production.

b. The interest rate is computed as follows:

= Savings / Increased inventory

= $ 36,000 / $ 300,000

= 12%

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