Answered step by step
Verified Expert Solution
Question
1 Approved Answer
Boehm Corporation produces satellite earth stations that sell for $150,000 each. The firm's fixed costs are $1.5 million, 20 earth stations are produced and sold
Boehm Corporation produces satellite earth stations that sell for $150,000 each. The firm's fixed costs are $1.5 million, 20 earth stations are produced and sold each year. Profits are $400,000 and the firm's assets (all equity financed) are $5million. Due to technological advances in the industry the firm estimates that it can change its production process by adding $10 million to assets and $500,000 to fixed operating costs. This change will reduce variable costs per unit by $5,000 and increase output by 30 units. However, the sales price on all units must be lowered to $140,000 to permit sales of the additional units. Boehm Corporation has tax carryforwards that render its tax rate zero, its cost of equity is 18% and it has no debt in its capital structure. Thus, the company's prot is equal to earnings before interest and taxes (EBIT) I h. Determine the company's variable cost per unit and break-even quantity under the initial plan. i. Determine the company's variable cost per unit and break-even quantity under the proposed plan. j. Would the new proposed plan expose the rm to more or less business risk than the initial plan. Show your work
Step by Step Solution
There are 3 Steps involved in it
Step: 1
Get Instant Access to Expert-Tailored Solutions
See step-by-step solutions with expert insights and AI powered tools for academic success
Step: 2
Step: 3
Ace Your Homework with AI
Get the answers you need in no time with our AI-driven, step-by-step assistance
Get Started