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28 May, 02:13

Olin Transmissions, Inc., has the following estimates for its new gear assembly project: price = $2,500 per unit; variable costs = $500 per unit; fixed costs = $5.1 million; quantity = 80,000 units. Suppose the company believes all of its estimates are accurate only to within ±15 percent. What values should the company use for the four variables given here when it performs its best-case scenario analysis? What about the worst-case scenario?

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  1. 28 May, 03:54
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    Company should use following value:

    According to best case scenario,

    Price = $2,875 per unit

    Variable costs $425 per unit

    Fixed costs = $4.335 million

    Quantity = 92,000 units

    According to worst case scenario,

    Price = $2,125 per unit

    Variable costs = $575 per unit

    Fixed costs = $5.865 million

    Quantity = 68,000 units

    Explanation:

    Best case scenario

    The best cash scenario is where the business has maximum benefit. The Increase in revenue and profit is beneficial and decrease in expenses and losses are also beneficial.

    According to best case scenario,

    Price = $2,500 per unit x (100% + 15%) = $2,875 per unit

    Variable costs = $500 per unit (100% - 15%) = $425 per unit

    Fixed costs = $5.1 million (100% - 15%) = $4.335 million

    Quantity = 80,000 units (100% + 15%) = 92,000 units

    Worst case scenario

    The worst cash scenario is where the business has maximum loss. The Increase in Expenses and losses are detrimental and decrease in revenue and profits are also detrimental.

    According to worst case scenario,

    Price = $2,500 per unit x (100% - 15%) = $2,125 per unit

    Variable costs = $500 per unit (100% + 15%) = $575 per unit

    Fixed costs = $5.1 million (100% + 15%) = $5.865 million

    Quantity = 80,000 units (100% - 15%) = 68,000 units
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