Answered step by step
Verified Expert Solution
Link Copied!

Question

1 Approved Answer

BWP projects sales of 100,000 units next year at an average price of $50 per unit. Variable costs are estimated at 40% of revenue, and

BWP projects sales of 100,000 units next year at an average price of $50 per unit. Variable costs are estimated at 40% of revenue, and fixed costs will be $2.4 million. BWP has $1 million in bonds outstanding on which it pays 7.5%, and its marginal tax rate is 39%. There are 100,000 shares of stock outstanding which trade at their book value of $30.

BWP intends to purchase a machine that will result in a major improvement in product quality along with a small increase in manufacturing efficiency. The machine will cost $1 million, which will be borrowed at 9%. The quality improvement is expected to have a significant impact on BWP's competitive position. Indeed, management expects sales to increase by 5% in spite of a planned 10% price increase. The efficiency improvement combined with the price increase will result in variable costs of 36% of revenue. Fixed cost, however, will rise by 19%. Calculate BWP's DFL and DTL before and after the acquisition of the new machine. Round your answers to two decimal places.

Without machine With machine
DFL
DTL

Step by Step Solution

There are 3 Steps involved in it

Step: 1

blur-text-image

Get Instant Access to Expert-Tailored Solutions

See step-by-step solutions with expert insights and AI powered tools for academic success

Step: 2

blur-text-image

Step: 3

blur-text-image

Ace Your Homework with AI

Get the answers you need in no time with our AI-driven, step-by-step assistance

Get Started

Recommended Textbook for

Local Public Finance

Authors: René Geissler, Gerhard Hammerschmid, Christian Raffer

1st Edition

3030674681, 978-3030674687

More Books

Students also viewed these Finance questions