Question

LED Energy Savings is analyzing a proposed project. The company expects to sell 8,000 units, plus or minus 2 percent. The expected variable cost per unit is $11 and the expected fixed costs are $287,000. The fixed and variable cost estimates are considered accurate within a plus or minus 5 percent range. The depreciation expense is $68,000. The tax rate is 32 percent. The sales price is estimated at $64 a unit, give or take 3 percent. What is the net income under the worst case scenario?

Answer 1

To calculate the net income under the worst case scenario, you need to consider the worst case scenario for each component of the project. This includes the number of units sold, variable cost per unit, fixed costs, depreciation expense, tax rate, and sales price. Once you have the worst case scenario values, you can use the formula to calculate the net income.

Step-by-step explanation:

In order to calculate the net income under the worst case scenario, we need to consider the worst case scenario for each component of the project.

For the number of units sold, the worst case scenario would be selling 8,000 units minus 2 percent, which is 8,000 - (8,000 imes 0.02) = 7,840 units.

For the variable cost per unit, the worst case scenario would be $11 plus 5 percent, which is $11 + ($11 imes 0.05) = $11.55.

The worst case scenario for fixed costs, depreciation expense, tax rate, and sales price can be calculated in a similar manner.

Once we have all the worst case scenario values, we can calculate the net income using the formula:

Net Income = (Sales Price - Variable Cost per Unit) imes Number of Units - Fixed Costs - Depreciation Expense imes (1 - Tax Rate)

Plugging in the worst case scenario values, we get:

Net Income = ($64 - $11.55) imes 7,840 - $287,000 - $68,000 imes (1 - 0.32)

Solving this equation will give us the net income under the worst case scenario.