Question

Sloan Transmissions, Inc., has the following estimates for its new gear assembly project: price = $2,800 per unit; variable costs = $560 per unit; fixed costs = $3.0 million; quantity = 86,000 units. Suppose the company believes all of its estimates are accurate only to within ±10 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:

- Values the company should use for the four variables when it performs its best-case scenario analysis:

+ Price = 3,080 per unit;

+ Variable costs = $504 per unit;

+ Fixed cost = $2.7 million;

+ Quantity = 94,600 units.

- Values the company should use for the four variables when it performs its worst-case scenario analysis:

 + Price = 2,520 per unit;

+ Variable costs = $616 per unit;

+ Fixed cost = $3.3 million;

+ Quantity = 77,400 units.

Explanation:

- Under the best-case scenario analysis, price and quantity should be given the highest ( thus the best) estimates while variable costs and fixed costs should be given the lowest ( thus the best) estimates. So, we have:

+ Price = 2,800 x 1.1 = 3,080 per unit;

+ Variable costs = 560 x 0.9 = $504 per unit;

+ Fixed cost = 3 million x 0.9 = $2.7 million;

+ Quantity = 86,000 x 1.1 = 94,600 units.

- Under the worst-case scenario analysis, price and quantity should be given the lowest ( thus the worse) estimates while variable costs and fixed costs should be given the highest ( thus the worst) estimates. So, we have:

+ Price = 2,800 x 0.9 = 2,520 per unit;

+ Variable costs = 560 x 1.1 = $616 per unit;

+ Fixed cost = 3 million x 1.1 = $3.3 million;

+ Quantity = 86,000 x 0.9 = 77,400 units.