Question

Wisconsin Snowmobile Corp. is considering a switch to level production. Cost efficiencies would occur under level production, and aftertax costs would decline by $42,000, but inventory would increase by $420,000. Wisconsin Snowmobile would have to finance the extra inventory at a cost of 11.5 percent.

A. Determine the extra cost or savings of switching over to level production. Should the company go ahead and switch to level production?

B How low would interest rates need to fall before level production would be feasible?

Answer 1

The savings from the switch is negative savings of $6300,in other words loss is recorded not savings in costs.

The interest would have to fall to 10% for the planned switch to production to be feasible.

Step-by-step explanation:

The extra cost savings of switching over to level production is given below

Cost savings $42000

interest on inventory finance($420000*11.5%) ($48300)

Negative savings ($6,300)

The company would a loss of $6300 if it switches to level production,hence it is advisable to shelve the plan for now.

However,interest rates would have to fall to 10% as calculated below to make the planned switch to level production feasible

new interest rate=savings/increase in inventory

=42000/420000*100

=10%