A proposed project has estimated sale units of 2,500, give or take 2 percent.. T

Question

A proposed project has estimated sale units of 2,500, give or take 2 percent.. The expected variable cost per unit is $6.79 and the expected fixed costs are $17,500. Cost estimates are considered accurate within a plus or minus 3 percent range. The depreciation expense is $2,850. The sale price is estimated at $15.40 a unit, give or take 3 percent. The company bases its sensitivity analysis on the expected case scenario. If a sensitivity analysis is conducted using a variable cost estimate of $7, what will be the total annual variable costs?

Explanation / Answer

The Expected Total Annual Variable Costs at estimated cost of $7 =

Sales Units 2500 2500- 2% = 2450 2500+ 2% = 2550 Variable cost per unit $7 $7 - 3% = $6.79 $7 + 3% = $7.21 Total Variable Cost Estimated $17500 $16635.50 $18385.50 Expected Total Annual Variable Costs $(17500+16635.50+18385.50)/3 = $17507

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