Question

3. Scenario Analysis [LO2] 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

Base Case:

Selling Price per unit = $1,440
Variable Costs per unit = $460
Fixed Costs = $3,900,000
Sales Volume = 85,000

Best Case:

Selling Price per unit = $1,440 * (1 + 0.15)
Selling Price per unit = $1,656

Variable Costs per unit = $460 * (1 - 0.15)
Variable Costs per unit = $391

Fixed Costs = $3,900,000 * (1 - 0.15)
Fixed Costs = $3,315,000

Sales Volume = 85,000 * (1 + 0.15)
Sales Volume = 97,750

Worst Case:

Selling Price per unit = $1,440 * (1 - 0.15)
Selling Price per unit = $1,224

Variable Costs per unit = $460 * (1 + 0.15)
Variable Costs per unit = $529

Fixed Costs = $3,900,000 * (1 + 0.15)
Fixed Costs = $4,485,000

Sales Volume = 85,000 * (1 - 0.15)
Sales Volume = 72,250