Chapter 5 Online Homework
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Transcript of Chapter 5 Online Homework
Problem 5 a & bAlagie DarboeProblem 5:American Fruit Co. is considering constructing a new plant to process frozen fruit juice.One plant would be capital intensive, the other much more labor intensive. Although thefinal decision would hinge on the relative cost of capital versus labor in the northern California area, management is curious about the behavior of the plants return on assets during a typical business cycle.Plant 1Plant 2Fixed Cost$200,000.00$600,000.00Variable Cost (per unit)$1.50$0.50Price (per unit)$2.00$2.00Investment$1,000,000.00$1,000,000.00a) Given the following information, calculate the break-even point in units of production for the two plantsAnswer:Break-even point in units for Plant 1400000.00UnitsBreak-even point in units for Plant 2400000.00Unitsb)The economics department has prepared sales projections for three business scenarios: recession, normal, and recovery. Sales under each scenario are expected to be as follows: recession, 300,000 units; normal, 500,000 units; and recovery, 800,000 units. Calculate the return on assets for the two plants under these three scenarios. Answer: ScenarioRecessionNormalRecoveryAverage ROAUnits300,000500,000800,000ROA-5%5%20%0.0667c)ProbabiltyRecession-0.11670.0136110.330.00454Normal-0.01670.0002780.339.3E-05Recovery0.13330.0177780.330.00593Variance0.0105561.0556%Standard Deviation 0.102740210.2740%