Warning: foreach() argument must be of type array|object, bool given in /var/www/html/web/app/themes/studypress-core-theme/template-parts/header/mobile-offcanvas.php on line 20

Wisconsin Snowmobile Corp. is considering a switch to level production. Cost efficiencies would occur under level production, and after-tax costs would decline by \(36,000, but inventory would increase by \)300,000. Wisconsin Snowmobile would have to finance the extra inventory at a cost of 13.5 percent.

a. Determine the extra cost or savings of switching over to level production. Should the company go ahead and switch to level production?

Short Answer

Expert verified

The company would suffer a loss of $4,500 so they should not switch over to level production.

Step by step solution

01

Calculation of switching over to level of production

The switch over to level production will result in a loss of $4,500.

Switchingovercost=Increasedinventory×Interestexpense-Savings=$300,000×13.5%-$36,000=$40,500-$36,000=$4,500(loss)

02

Company’s decision for switch-over

The company should not switch over to level production as the ROI is less than the cost of production under level production. The company will suffer a loss of $4,500 under level production.

Unlock Step-by-Step Solutions & Ace Your Exams!

  • Full Textbook Solutions

    Get detailed explanations and key concepts

  • Unlimited Al creation

    Al flashcards, explanations, exams and more...

  • Ads-free access

    To over 500 millions flashcards

  • Money-back guarantee

    We refund you if you fail your exam.

Over 30 million students worldwide already upgrade their learning with Vaia!

One App. One Place for Learning.

All the tools & learning materials you need for study success - in one app.

Get started for free

Most popular questions from this chapter

What advantages do compensating balances have for banks? Are the advantages to banks necessarily disadvantages to corporate borrowers?

City Farm Insurance has collection centers across the country to speed up collections. The company also makes its disbursements from remote disbursement centers so the firm’s checks will take longer to clear the bank. Collection time has been reduced by two days and disbursement time increased by one day because of these policies. Excess funds are being invested in short-term instruments yielding 12 percent per annum.

b. How much can City Farm earn in dollars per year on short-term investments made possible by the freed-up cash?

Neon Light Company of Kansas City ships lamps and lighting appliances throughout the country. Ms. Neon has determined that through the establishment of local collection centers around the country, she can speed up the collection of payments by three days. Furthermore, the cash management department of her bank has indicated to her that she can defer her payments on her accounts by one-half day without affecting suppliers. The bank has a remote disbursement center in Florida.

b. If Neon Light Company can earn 6 percent per annum on freed-up funds, how much will the income be?

Explain why the bad debt percentage or any other similar credit-control percentage is not the ultimate measure of success in the management of accounts receivable. What is the key consideration?

Explain how rapidly expanding sales can drain the cash resources of a firm.

See all solutions

Recommended explanations on Business Studies Textbooks

View all explanations

What do you think about this solution?

We value your feedback to improve our textbook solutions.

Study anywhere. Anytime. Across all devices.

Sign-up for free