North Pole Snowmobile is considering a switch to level production. Under level production, cost efficiencies would occur and aftertax costs would decline by $30,000, but inventory would increase by $250,000. North Pole would have to finance the extra inventory at a cost of 13.5 percent.
a. Should the company go ahead and switch to level production?
b. How low would interest rates need to fall before level production would be feasible?