Reference no: EM133495901

Question

Boehm Corporation produces satellite earth stations that sell for $150,000 each. The firm's fixed costs are $1.5 million, 20 earth stations are produced and sold each year. Profits are $400,000 and the firm's assets (all equity financed) are $5million. Due to technological advances in the industry the firm estimates that it can change its production process by adding $10 million to assets and $500,000 to fixed operating costs. This change will reduce variable costs per unit by $5,000 and increase output by 30 units. However, the sales price on all units must be lowered to $140,000 to permit sales of the additional units. Boehm Corporation has tax carryforwards that render its tax rate zero, its cost of equity is 18% and it has no debt in its capital structure. Thus, the company's profit is equal to earnings before interest and taxes (EBIT)

1. Determine the company's variable cost per unit and break-even quantity under the initial plan.

2. Determine the company's variable cost per unit and break-even quantity under the proposed plan.

3. Would the new proposed plan expose the firm to more or less business risk than the initial plan. Show your work.