Wisconsin Snowmobile Corp. is considering a switch to level production. Cost efficiencies would occur under level production, and aftertax costs would decline by $36,000, but inventory would increase by $300,000. Wisconsin Snowmobile has to finance the extra inventory at a cost of 13.5 percent.
a. Determine the extra cost or savings of switching over to level production. Should the company go ahead and switch to level production?
b. How low would interest rates need to fall before level production would be feasible?