Question

Schweser Satellites Inc. produces satellite earth stations that sell for $95,000 each. The firm's fixed costs, F, are $2.5 million, 50 earth stations are produced and sold each year, profits total $600,000, and the firm's assets (all equity financed) are $5 million. The firm estimates that it can change its production process, adding $3.5 million to assets and $310,000 to fixed operating costs. This change will reduce variable costs per unit by $12,000 and increase output by 16 units. However, the sales price on all units must be lowered to $83,000 to permit sales of the additional output. The firm has tax loss carryforwards that render its tax rate zero, its cost of equity is 13%, and it uses no debt. 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 year (defined as the incremental profit divided by the investment)? Round your answer to two decimal places. % Should the firm make the investment? Would the firm's break-even point increase or decrease if it made the change? Would the new situation expose the firm to more or less business risk than the old one? I. The new situation would obviously have more business risk than the old one. II. The new situation would obviously have less business risk than the old one. III. It is impossible to state unequivocally whether the new situation would have more or less business risk than the old one.

Answer 1

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Home ert Page Layout Formulas Data Review V Add-Ins 義Cut AutoSum General ta copy." Fill В า 프. m. a-Δ. Ξミ 迣锂函Merge & Center. $, % , 弼皛Conditional Format. Cell. Insert Delete Format Paste Sort &Find & Format Painter Formatting as Table Styles ClearFilter Select Clipboard Font Styles Cells dting Alignment IZ130 IX IY JA JB JC JD JE JF JG JH 130 PRESENT 131 SALES 4750000 (50 X 95000) 132 VARIABLE COSTS 1650000 (4750000 3100000) 133 3100000 (2500000600000) CONTRIBUTION 134 FIXED COSTS 2500000 135 EBIT OR PROFIT 136 137 SO VARIABLE COST PER UNIT-1650000/50 = 33000 138 ENT3500000 139 NOW, NEW INVESTMENT- 21000 (33000 12000] 140 REVISED VARIABLE COST = 141 ADDITIONAL SALES = 16 UNITS 142 143 REVISED 144 5478000 (83000 X 66] SALES 145 VARIABLE COSTS1386000 [21000 x 66] 146 CONTRIBUTION 4092000 147 FIXED COSTS 2810000 (2500000310000) 148 EBIT OR PROFIT 1282000 45 d FIFO CASH BUDGET BV MV ratio VARIANCE BEP. OLFL ratios DETROIT oat B-S oss SALES BUDGET DIFF ANALYSIS 03:05 옐4L ..alt@ m*6 ENG 19-05-2019 "z

Home ert Page Layout Formulas Data Review V Add-Ins % Cut 11 -A Wrap Text General iete Format Autos m3r a te $For at Painter B 1 u . 討Merge & Center. 'il a conditional as roat, Styes. Conditional F a at 1n insert Delete Format Sort &Find & Ξ !론 S. % , . Format Painter 袖 2 Clear , Formatting ▼ as Table-styles ▼ Filter Select ▼ ▼ ▼ Clipboard Font Cells dting Alignment er IX169 IX IY iZ JA JB JC 」D JE JF JH 151 682000 (1282000 -600000) INCREMENTAL PROFIT 152 RETURN ON INVESTMENT- INCREMENTAL PROFIT/INVESTMENT RETURN ON INVESTMENT: 682000/3500000-19.49% 153 154 155 156 12.00% (6000005000000) PRESENT RETURN ON INVESTMENT 157 158 YES, AS RETURN ON INVESTMENT IS HIGHER ON INCREMENTAL INVESTMENT, IT SHOULD BE MADE 159 160 PRESENT BREAKEVEN POINT FIXED COST/ (SELLING PRICE-VARIABLE COST) PRESENT BREAKEVEN POINT = 2500000/(95000-33000)- REVISED BREAKEVEN POINT 2810000/(83000-21000)- 161 40.32 162 45.32 163 164 BREAKEVEN POINT WILL INCREASE, IF CHANGE IS MADE 165 DEGREE OF OPERATING LEVERAGE (DOL)-CONTRIBUTION/EBIT 166 167 3100000/600000 4092000/1282000 PRESENT 5.17 3.19 168 REVISED = AS DOL HAS DECREASED, NEW SITUATION WOULD HAVE OBVIOUSLY LESS RISK THAN OLD ONE 169 ANSWER: II ! ROE, BV MV ato VARIANCE BEP OL FL atos DETROIT fi at B-S profit loss SALES BUDGET dupont_ DIFF ANALYSIS ove (4 FIFO CASH BUDGET 45 d 19-05-2019