Miller Mfg. is analyzing a proposed project. The company expects to sell 12,000
ID: 2740230 • Letter: M
Question
Miller Mfg. is analyzing a proposed project. The company expects to sell 12,000 units, plus or minus 3 percent. The expected variable cost per unit is $8.00 and the expected fixed cost is $36,000. The fixed and variable cost estimates are considered accurate within a plus or minus 4 percent range. The depreciation expense is $33,000. The tax rate is 34 percent. The sale price is estimated at $15.00 a unit, give or take 4 percent.
What is the net income under the worst case scenario?
2.
One year ago, you invested $3,580. Today it is worth $3,700. What rate of interest did you earn?
3.27 percent
3.29 percent
3.35 percent
6.34 percent
$331.20
$461.56
$218.59
$457.12
A.3.27 percent
B.3.29 percent
C.3.35 percent
D.6.34 percent
Explanation / Answer
(1). Expected Sale = 12,000 units
Worst case scenario = (12,000 - 3% of 12,000) units = 11,640 units
Expected variable cost = $ 8 p.u.
Worst case scenario = $ (8 + 4% of 8) p.u. = $ 8.32 p.u.
Total variable cost in Worst case scenario = $ (11,640 * 8.32) = $ 96,844.80
Expected fixed cost = $ 36,000
Worst case scenario = $ (36,000 + 4% of 36,000) p.u. = $ 37,440
Total Cost in worst case scenario = $ (96,844.80 + 37,440) = $ 134,284.80
Expected sale price = $ 15 p.u.
Worst case scenario = $ (15 - 4% of 15) p.u. = $ 14.40 p.u.
Total sale in Worst case scenario = $ (11,640 * 14.40) = $ 167,616
Total Profit (Worst Case) = Total Sale - Total Cost = $ (167,616 - 134,284.80) = $ 33,331.20
Gross Profit (Worst Case) = Total Profit - Depreciation = $ (33,331.20 - 33,000) = $ 331.20
Tax Payable = 34% of Gross Profit = 34% of $ 331.20 = $ 112.608
Net Income (Worst Case) = Gross Profit - Tax Payable = $ (331.20 - 112.608) = $ 218.592 (C).
(2). Principal (P) = $3,580
Amount after 1 year (A) = $3,700
Rate of Interest = [(A / P) - 1] = [(3,700 / 3,580) - 1] = 3.35 % (C).