Question

a Search this Video Excel Online Structured Activity: Break-even Point DO Schweser Satellites Inc. produces satellite earth stations that sell for $95,000 each. The firm's fixed costs, F, are $1.5 million, 50 earth stations are produced and sold each year, profits total $400,000; and the firm's assets (all equity financed) are $6 million. The firm estimates that it can change its production process, adding $3.5 million to investment and $490,000 to fixed operating costs. This change will (1) reduce variable costs per unit by $10,000 and (2) increase output by 23 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 carry forwards that render its tax rate zero, its cost of equity is 13%, and it uses no debt. The data has been collected in the Microsoft Excel Online file below. Open the spreadsheet and perform the required analysis to answer the questions below. Open spreadsheet a. 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 vear defined as the incremental nrnfit dividerl hy the investment 12 nn nnt und intermediate ralculations Next

please help me to solve for the correct answers. thank you

Answer 1

a)
	Original	Changes	Revised	Incremental profit
Units	50		73
SP	95000	revised	87000
VC	57000 (Bal. Fig.)	less 10000	47000
Contri / unit	38000		40000
Total Contri	1900000		2920000
FC	1500000	added 490000	1990000
Profit	400000		930000	530000
Incremental Investment				3500000
Projects profitability				15.14%
Cost of Equity (COE)				13%
Should firm make the investment				YES, as higher to COE
b) BEP	39.47		49.75	INCREASE IN BEP
c) answer III : The new situation would obviously have more business risk than the old one.
This is because slight reduction in sales will bring profitability below COE and overall loss.