 Business
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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Answers (1)
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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