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Homework answers / question archive / Wisconsin Snowmobile Corp
Wisconsin Snowmobile Corp. is considering a switch to level production. Cost efficiencies would occur under level production, and aftertax costs would decline by $40,300, but inventory would increase by $310,000. Wisconsin Snowmobile would have to finance the extra inventory at a cost of 14.5 percent.
a-1. Determine the extra cost or savings of switching over to level production.
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?
We will assume that the financing cost is after tax. If so, the company will spend 310,000*14.5% = $44,950.
a-1. The extra cost is 40,300 - 44,950 = -$4,650.
a-2. No because the cost outweighs the savings.
b. Let's denote the interest rate by r. Then, 310,000 * r = 40,300
r = 13% . Level production would be feasible if interest rate is less than or equal to 13%
