Simon Inc. currently produces 110,000 units at a cost of $440,000. The cost is variable. Next year Simon Inc. expects to produce
1 answer:
Complete question:
Simon Inc. currently produces 110,000 units at a cost of $440,000. The cost is variable. Next year Simon Inc. expects to produce 115,000 units. Simon's relevant range for production is 100,000 to 120,000 units. If 115,000 units are produced next year, what is the expected variable cost?
A) $420,000
B) $430,000
C) $440,000
D) $460,000
Explanation:
Given ,
Simon Inc. currently produces 110,000 units at a cost of $440,000
Next year Simon Inc. expects to produce 115,000 units
Range for production is 100,000 to 120,000 units.
Now , we need to find out
If 115,000 units are produced next year, then the expected variable cost equation is ,
Variable cost per unit =
= $460,000
You might be interested in
Answer and Explanation:
The computation is shown below:
Year Cash flow PVF at 12% PV at 12%
D0 0 0 1 0
D1 0 0 0.89286 0
D2 0 0 0.79719 0
D3 2.25 2.25 0.71178 1.601505 (A)
D4 2.25 × 1.117^1 = 2.51325 0.63552 1.597221 (B)
D5 2.25 × 1.117^2 = 2.80730 0.56743 1.592946 (C)
Now
Horizon Value at D5 is
= Next Year Dividend ÷ (Required Rate -Growth rate)
= (2.25 × 1.117^2 × 1.036) ÷ (0.12 - 0.036)
34.6234 34.6234 0.56743 19.64634 (D)
Current Value 24.43801 (A + B + C + D)
Horizon Value = 34.62
Intrinsic Value = 24.43
Now
Current expected dividend yield is
= Dividend ÷ Market Price
= 0 ÷ 24 ÷ 43
= 0 %
And, the minimum expected capital yield should be equivalent to the required rate of return i.e 12%
The company should not paying the dividend because it involves various reasons lime expansion plans, seasonal & cyclical sales, buy back shares
