Question

Sloan Transmissions, Inc., has the following estimates for its new gear assembly project: price = $1,440 per unit; variable costs = $460 per unit; fixed costs = $3.9 million; quantity = 85,000 units. Suppose the company believes all of its estimates are accurate only to within ±15 percent. What values should the company use for the four variables given here when it performs its best-case scenario analysis? What about the worst-case scenario?

Answer 1

Answer:

Best case scenario:

Selling price = $1,656 per unit

Variable costs = $391 per unit

Fixed costs = $3.315 million

Quantity sold = 97,750 units.

Worst case scenario:

Selling price = $1,224 per unit

Variable costs = $529 per unit

Fixed costs = $4.485 million

Quantity sold = 72,250 units.

Explanation:

Selling price (P) = $1,440 per unit

Variable costs (V) = $460 per unit

Fixed costs (F)= $3.9 million

Quantity sold (Q) = 85,000 units.

The company's revenue is given by:

$R=P*Q - (V*Q) - F$

For the best case scenario, that is, to maximize revenue, price and quantity sold must be at the highest value (+15%) while fixed and variable costs must be at the lowest value (-15%).

Selling price (P) = $1,440 * 1.15 = $1,656 per unit

Variable costs (V) = $460 *0.85 = $391 per unit

Fixed costs (F)= $3.9 *0.85 = $3.315 million

Quantity sold (Q) = 85,000 *1.15 = 97,750 units.

For the worst case scenario, that is, to minimize revenue, price and quantity sold must be at the lowest value (-15%) while fixed and variable costs must be at the highest value (-15%).

Selling price (P) = $1,440 * 0.85 = $1,224 per unit

Variable costs (V) = $460 *1.15 = $529 per unit

Fixed costs (F)= $3.9 *1.15= $4.485 million

Quantity sold (Q) = 85,000 *0.85 = 72,250 units.