Wisconsin Snowmobile Corp. is considering a switch to level production. Cost eff

Question

Wisconsin Snowmobile Corp. is considering a switch to level production. Cost efficiencies would occur under level production, and aftertax costs would decline by $23,100, but inventory costs would increase by $330,000. Wisconsin Snowmobile would have to finance the extra inventory at a cost of 8.0 percent. (a-1) Determine the extra cost or savings of switch over to level production. (Input the amount as positive value. Omit the "$" sign in your response.) $ (a-2) Should the company go ahead and switch to level production? No Yes (b) How low would interest rates need to fall before level production would be feasible? (Omit the "%" sign in your response.) Interest rate %

Explanation / Answer

a) Inventory increase by =$330,000

*interest expense(8%)= * 0.08

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increased Cost = $26,400

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Savings = $23,100

Increased Cost =-$26,400

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Loss =-$3,300

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No ,the company should not switch to level production.

b)Interest rate =23,100/330,000 =7%

If the interest rate fall to 7% or less,the switch would be Feasiable.

However ,the decision is more complicated because it depends on expectations for interest rate.If extra inventory were considered permanent current assets and was financed by locking long term interest rates below 7%, then it would make sense to switch.however given short-term Rates are volatile ,this decision cant be made on dip in short-term interest rate below 7%.

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