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tangare [24]
3 years ago
6

Bambino Sporting Goods makes baseball gloves that are very popular in the spring and early summer season. Units sold are anticip

ated as follows: Monthly Unit Sales March 3,250 April 7,250 May 11,500 June 9,500 31,500 Total units sold If seasonal production is used, it is assumed that inventory will directly match sales for each month and there will be no inventory buildup. The production manager thinks the preceding assumption is too optimistic and decides to go with level production to avoid being out of merchandise. He will produce the 31,500 units over 4 months at a level of 7,875 per month. a. What is the ending inventory at the end of each month

Business
1 answer:
Nadya [2.5K]3 years ago
7 0

Answer:

Check the explanation

Explanation:

The Ending inventory <em><u>(which is the quantity of records of stock a company has at the ending of its financial year. It is strongly associated with ending inventory cost, which can be referred to as the amount of money that was used to get these goods in stock.)</u></em> at the end of each month can be seen in the attached image below:

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Explanation:

Before starting, we need to convert unlevered beta into levered beta:

Levered beta of Division 1: 1.2 x ( 1 + (1-40%) x 0.25) = 1.38

Leverage beta of Division 2: 1.46 x ( 1+ (1-40%) x 0.25) = 1.679

Then, we start step by step as below:

First, using the CAPM model: Cost of equity = risk-free rate of return +  beta *(Market Rate of Return – Risk-free Rate of Return) , we find the cost of equity for Division 1 and Division 2.

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  - Division 2's cost of equity = 4% + 1.46 x (12% - 4%) = 17.432%

Second, determine the post-tax cost of debt applied for both Division: 6% x (1-tax rate) = 6% x (1 -40%) = 3.60%

Third, calculate the WACC for each Division:

  - Division 1's WACC = % of debt in capital structure x cost of debt + % of equity in capital structure x cost of equity = 20% x 3.6% + 80% x 15.04% = 11.752%;

  - Division 2's WACC = % of debt in capital structure x cost of debt + % of equity in capital structure x cost of equity = 20% x 3.6% + 80% x 17.432% = 14.6656%;

Finally, compare the WACC between the two Division:

Division 1's WACC - Division 2's WACC = 11.752% - 14.6656% = - 1.9136% or Division 1 has the lower cost of capital of 1.9136% in absolute term comparing to Division 2.

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