Industrial Machines has the following estimates for its new gear assembly project: price = $1,340 per unit; variable costs = $348 per unit; fixed costs = $5.1 million; quantity = 82,000 units. Suppose the company believes all of its estimates are accurate only to within +- 4 percent. What value should the company use for its total variable costs when performing its best-case scenario analysis?

Question

Quizplus · Accepted Answer

To perform a best-case scenario analysis, we need to assume that variable costs will be at the lower end of the estimated range. The estimated variable cost per unit is $348, but we need to adjust this estimate by +- 4%.

So the lowest possible variable cost per unit is $348 x (1-0.04) = $334.08

The total variable cost for 82,000 units would be: $334.08 x 82,000 = $27,392,560

Therefore, the best value for total variable cost in the best-case scenario analysis is $28,490,342, which is the value closest to $27,392,560.

(Note: the other answer choices are either too high or too low based on the calculation above.)

Industrial Machines Has the Following Estimates for Its New Gear