Question

Wisconsin Snowmobile Corp. is considering a switch to level production. Cost efficiencies would occur under level production, and aftertax costs would decline by $36,800, but inventory would increase by $460,000. Wisconsin Snowmobile would have to finance the extra inventory at a cost of 9.0 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 Ο Νο b. How low would interest rates need to fall before level production would be feasible? (Input your answer as the nearest whole number.) Interest rate %

Answer 1

Solution: a-1. Increase in inventory x interest rate Increase in cost cost savings Extra cost 460000 9.00% 41400 36800 4600 a-2. Should the company go ahead and switch to level production? No. (as it result in increase in cost) b. Interest rate=Cost savings/Increase in inventory 36800/460000