15-7 Break Even Point---Second submission--First time NO Response Schweser Satel

Question

15-7 Break Even Point---Second submission--First time NO Response

Schweser Satellites Inc produces satellite earth stations that sell for $100,000 each. The firm's fixed costs, F, are $2 million. 50 earth stations are produced and sold each year, profits total $500,000 and the firms assets (all equity financed) are $5 million. The firm estimates that it can change its production process adding $4 million to investment and $500,000 to fixed operating costs. This change will (1) reduce variable costs per unit by $10,000 and (2) increase output by 20 units, but (3) the sales price on all units will have to be lowered to $95,000 to permit sales of the additional output. The firm has tax loss carryforwards that render its tax rate zero, its cost of equity is 16% and it uses no debt.

a. what is the incremental profit? To get a rough idea of the project's profitability, what is the project's expected rate of return for the next year (defined as the incremental profit dividend by the investment)? Should the firm make the investment? Why or why not?-----The Answer is:Profit = $850,000; Return = 21.25% > rs = 15%--show all work and formulas to support answer.

b. Would the firm's break even point increase or decrease if it made the change?---The Answer is: Qbe,old = 40; Qbe, new = 45.45.---show all work and formulas to support answer.

c. Would the new situation expose the firm to more or less business risk than the old one?--Explain

Explanation / Answer

3- Would the new situation expose the firm to more or less business risk than the old one?--Explain

the new situation would expose the firm to more degree of business risk as BEP level has increased to 45.45 Units in comparison of the old one of 40 units so company will have to produce more to reach to no profit and loss situation.x

Answer for 1 Particulars Old Plan NewPlan Selling Price per Unit No of units Produced Total sales No of Units total Sales Incremental Sales 100000 50 5000000 Selling price per unit 95000 70 6650000 1650000 V.cost per Unit 50000 2500000 40000 2800000 300000 Contribution Margin 2500000 3850000 1350000 Fixed cost 2000000 2500000 500000 Profit 500000 1350000 850000 Investment 10 5000000 9000000 4000000 9000000 Answer for 2 Cost of fund 15% ROI = increased Profit/ increased Investment*100 21.25 rate of return is greater than cost of fund so it should be implemented Break even Point in unit = fixed cost/ contribution 0.8 0.64935065 Break even Point in revenue = BEP in units * Selling price per unit 40 45.4545455

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