Question

1.

2.

Wisconsin Snowmobile Corp. is considering a switch to level production. Cost efficiencies would occur under level production, and aftertax costs would decline by $28,000, but inventory would increase by $280,000. Wisconsin Snowmobile would have to finance the extra inventory at a cost of 11.5 percent a-1. Determine the extra cost or savings of switching over to level production Loss of. Loss of Profit of 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? (Input your answer as a percent rounded to the nearest whole number.) Interest rate

Answer 1

(1) Cost Savings = $ 28000, Increase in Inventory = $ 280000 and Interest Cost of Financing needed for Extra Inventory = 11.5 %

Additional Financing Cost Incurred = 0.115 x 280000 = $ 32200

Extra Cost Incurred = 32200 - 28000 = $ 4200

The company should NOT switch over to level production as it leads to additional cost

Let the required level of interest rate be R

Level Production will be feasible only when Inventory Financing Cost < After-Tax Cost Savings

R x 280000 < 28000

R < 0.1 or 10 %

Therefore, the interest rate needs to fall below 10% for level production ot be feasible.

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