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29 March, 20:26

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?

(b) How low would interest rates need to fall before level production would be feasible?

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  1. 29 March, 21:05
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    Answer and Explanation:

    a-1 The extra cost or saving is as follows

    Cost-saving $36,900

    Less: Increased cost ($410,000 * 10.5%) $43,050

    Loss - $6,150

    a-2 Since the company has suffered the loss of $6,150 so the company should not go to switch to level production

    b. Now the interest rate is

    = Saving cost : Inventory cost increased * 100

    = $36,900 : $410,000 * 100

    = 9%

    This interest rate is decreased by 9% or the switch is less for the feasible

    In the case when the inventory has to be considered permanent current assets and the locking long term interest rate is 10.5% so the switching option could be chosen but if it is volatile in short term interest rate, so it would become dip for short term interest rate i. e below 9%
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