Answered: What are the upper and lower bounds for…

Principles of Accounting Volume 2

19th Edition

ISBN:9781947172609

Author:OpenStax

Publisher:OpenStax

Chapter2: Building Blocks Of Managerial Accounting

Section: Chapter Questions

Problem 17MC: In the cost equation Y=a+bx, Y represents which of the following? A. fixed costs B. variable costs...

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You are considering a new product launch. The project will cost $750,000, have a 4-year life, and have no salvage value; depreciation is straight-line to zero. Sales are projected at 440 units per year; price per unit will be $17,700, variable cost per unit will be $14,400, and fixed costs will be $725,000 per year. The required return on the project is 12 percent, and the relevant tax rate is 23 percent.

a.	The unit sales, variable cost, and fixed cost projections given above are probably accurate to within ±10 percent. What are the upper and lower bounds for these projections?

Scenario
Upper bound
Lower bound
Unit sales
Variable cost per unit
Fixed costs
units

Expert Solution

Step 1

Revenue:

It is the amount received from the firm's normal operations. Revenue involves the sale of the firm's goods and services.

Variable Cost:

These are costs proportional to sales. Hence, an increase in sales will increase the variable cost and vice-versa. Examples of variable costs are labor costs, commission on sales, etc.

Fixed Cost:

These are costs paid by the firm irrespective of the specific business activities. Hence fixed costs are not affected by the change in sales level. Examples of fixed costs are rent, salaries, depreciation, etc.

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