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Olin Transmissions, Inc., has the following estimates for its new gear assembly project: price = $2,500 per unit; variable costs = $500 per unit; fixed costs = $5.1 million; quantity = 80,000 units. Suppose the company believes all of its estimates are accurate only to within ±15 percent. What values should the company use for the four variables given here when it performs its best-case scenario analysis? What about the worst-case scenario?

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Answer:

Company should use following value:

According to best case scenario,

Price = $2,875 per unit

Variable costs $425 per unit

Fixed costs = $4.335 million

Quantity = 92,000 units

According to worst case scenario,

Price = $2,125 per unit

Variable costs =$575 per unit

Fixed costs = $5.865 million

Quantity = 68,000 units

Explanation:

Best case scenario

The best cash scenario is where the business has maximum benefit.  The Increase in revenue and profit is beneficial and decrease in expenses and losses are also beneficial.

According to best case scenario,

Price = $2,500 per unit x ( 100% + 15% ) = $2,875 per unit

Variable costs = $500 per unit ( 100% - 15% ) = $425 per unit

Fixed costs = $5.1 million( 100% - 15% ) = $4.335 million

Quantity = 80,000 units ( 100% + 15% ) = 92,000 units

Worst case scenario

The worst cash scenario is where the business has maximum loss.  The Increase in Expenses and losses are detrimental and decrease in revenue and profits are also detrimental.

According to worst case scenario,

Price = $2,500 per unit x ( 100% - 15% ) = $2,125 per unit

Variable costs = $500 per unit ( 100% + 15% ) = $575 per unit

Fixed costs = $5.1 million( 100% + 15% ) = $5.865 million

Quantity = 80,000 units ( 100% - 15% ) = 68,000 units

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