MMPA 6365 Ethics in Preserving Public Safety

MMPA 6365 Ethics in Preserving Public Safety

Wisconsin Snowmobile Corp. is considering a switch to level production. Cost efficiencies would occur under level production, and aftertax costs would decline by $36,900, but inventory costs would increase by $410,000. Wisconsin Snowmobile would have to finance the extra inventory at a cost of 10.5 percent.

(a-1) Determine the extra cost or savings of switch over to level production. (Input the amount as positive value. Omit the “$” sign in your response.) $

(a-2) Should the company go ahead and switch to level production? Yes No

(b) How low would interest rates need to fall before level production would be feasible? (Omit the “%” sign in your response.) Interest rate %

Solution:

Part a

Inventory increase by = 410,000

Interest cost on increased inventory (at rate of 10.5%) = 410,000*10.5% = 43,050 – [A]

Savings = 36,900 – [B]

Loss = 6,150 – [C] = [B] – [A]

Since the switch to level production results I a loss. The company should not go ahead with the shift.

Part b

If the interest rates fall to 9% or less [36,900 / 410,000], the switch would be feasible.

MMPA 6365 Ethics in Preserving Public Safety MMPA 6365 Ethics in Preserving Public Safety