Question

Sloan Transmissions, Inc., has the following estimates for its new gear assembly project: price = $1,600 per unit; variable costs = $320 per unit; fixed costs = $2.7 million; quantity = 78,000 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

Best case scenario analysis :

In a best case scenario, sales price would be highest. Sales price to use = $1,600 * (1 + 10%) = $1,760 per unit

In a best case scenario, variable cost would be lowest. Variable cost to use = $320 * (1 - 10%) = $288 per unit

In a best case scenario, fixed cost would be lowest. Fixed cost to use = $2.7 million * (1 - 10%) = $2.43 million

In a best case scenario, quantity sold would be highest. Quantity sold to use = 78,000 * (1 + 10%) = 85,800

Worst case scenario analysis :

In a worst case scenario, sales price would be lowest. Sales price to use = $1,600 * (1 - 10%) = $1,440 per unit

In a worst case scenario, variable cost would be highest. Variable cost to use = $320 * (1 + 10%) = $352 per unit

In a worst case scenario, fixed cost would be highest. Fixed cost to use = $2.7 million * (1 + 10%) = $2.97 million

In a worst case scenario, quantity sold would be lowest. Quantity sold to use = 78,000 * (1 - 10%) = 70,200