Wisconsin Snowmobile Corp. is considering a switch to level production. Cost efficiencies would occur under level production, and aftertax costs would decline by $36,900, but inventory costs would increase by $410,000. Wisconsin Snowmobile would have to finance the extra inventory at a cost of 10.5 percent. (a-1) Determine the extra cost or savings of switch over to level production. (Input the amount as positive value. Omit the "$" sign in your response.) $
(a-2) Should the company go ahead and switch to level production?
(b) How low would interest rates need to fall before level production would be feasible?

Answer and Explanation:

a-1 The extra cost or saving is as follows

Cost-saving  $36,900

Less: Increased cost ($410,000 × 10.5%) $43,050

Loss   -$6,150

a-2 Since the company has suffered the loss of $6,150 so the company should not go to switch to level production

b. Now the interest rate is

= Saving cost ÷ Inventory cost increased × 100

= $36,900 ÷ $410,000 × 100

= 9%

This interest rate is decreased by 9% or the switch is less for the feasible

In the case when the inventory has to be considered permanent current assets and the locking long term interest rate is 10.5% so the switching option could be chosen but if it is volatile in short term interest rate, so it would become dip for short term interest rate i.e below 9%

rational decision making is a multi-step process for making choices between alternatives. the process of rational decision making favors logic, objectivity, and analysis over subjectivity and insight. the word “rational” in this context does not mean sane or clear-headed as it does in the colloquial sense.

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