Question

Louise Inc. has the following estimates for its new gear assembly project: price = $1,900 per unit; variable costs = $170 per unit; fixed costs = $6,000,000; quantity = 105,000 units. Suppose the company believes all of its estimates are accurate only within + or - 15%. 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? (Best case scenario: $2,185; $144.5; $5,100,000; 120,750 units. Worst case scenario: $1,615; $195.5; $6,900,000; 89,250 units)

no excel please

Answer 1

Since the estimates can vary +- 15%, best case price will be estimated + 15% and worst case price will be estimated – 15%

For Best Case:

Price per unit = 1,900*(1+0.15) = $2,185

Variable Cost per Unit in best case will be 15% lower than estimated since it is a cost = 170*85% = $144.5

Fixed Costs will be 15% lower since it is a cost, 6,000,000*85% = $5,100,000

Quantity in best case will be more, 105,000*115% = 120,750 units

For worst case, costs will be 15% more and price and quantity will be 15% less

Price = 1900*85% = $1,615

VC per Unit= 170*115% = $195.5

FC = 6,000,000*115% = $6,900,000

Units = 105,000*85% = 89,250