Snowmobile Inc. manufactures two colours of snowmobiles: White and Black. Marketing believes that it can sell between 12,000 and 18,000 of either product during the upcoming year. Due to the overall economic slowdown, the company is preparing to produce only one model for next year. The following information has been provided by the accounting department:
For next year, fixed costs will total $9,450,000 if White is produced and $11,640,000 if Black is produced. Plant capacity allows up to 107,800 direct manufacturing hours. White takes 9.8 hours to produce and Black requires 11 hours. The company is subject to a 30 percent income tax rate.
Required:
Which model should Snowmobile Inc. produce, assuming the marketing manager believes annual demand of either model will exceed production capacity? Why?

Question

Snowmobile Inc. manufactures two colours of snowmobiles: White and Black. Marketing believes that it can sell between 12,000 and 18,000 of either product during the upcoming year. Due to the overall economic slowdown, the company is preparing to produce only one model for next year. The following information has been provided by the accounting department:
  For next year, fixed costs will total $9,450,000 if White is produced and $11,640,000 if Black is produced. Plant capacity allows up to 107,800 direct manufacturing hours. White takes 9.8 hours to produce and Black requires 11 hours. The company is subject to a 30 percent income tax rate.
Required:
Which model should Snowmobile Inc. produce, assuming the marketing manager believes annual demand of either model will exceed production capacity? Why?

Quizplus · Accepted Answer

The Answer of Snowmobile Inc. manufactures two colours of snowmobiles: White and Black. Marketing believes that it can sell between 12,000 and 18,000 of either product during the upcoming year. Due to the overall economic slowdown, the company is preparing to produce only one model for next year. The following information has been provided by the accounting department:
  For next year, fixed costs will total $9,450,000 if White is produced and $11,640,000 if Black is produced. Plant capacity allows up to 107,800 direct manufacturing hours. White takes 9.8 hours to produce and Black requires 11 hours. The company is subject to a 30 percent income tax rate.
Required:
Which model should Snowmobile Inc. produce, assuming the marketing manager believes annual demand of either model will exceed production capacity? Why?