Webster United is considering adding a new product to their lineup. The company expects to sell 15,000 units, give or take 3 percent, of this item. The expected variable cost per unit is $12 and the
Expected total ﬁxed cost is $21,000. The ﬁxed and variable cost estimates are considered accurate
Within a plus or minus 5 percent range. The depreciation expense is $22,000. The tax rate is 35
Percent. The sale price is estimated at $15 a unit, give or take 2 percent.
What is the net income under the worst case scenario?
A) -$13,495
B) -$11,898
C) -$9,043
D) -$8,772
E) -$4,209

Question

Quizplus · Accepted Answer

Worst case scenario:
Units sold = 15,000 − 3% * 15,000 = 14,550
Variable cost per unit = $12
Total variable cost = 14,550 * $12 = $174,600
Fixed cost = $21,000
Depreciation expense = $22,000
Sale price per unit = $15 + 2% * $15 = $15.30
Total revenue = 14,550 * $15.30 = $222,015
Total cost = $174,600 + $21,000 + $22,000 = $217,600
EBIT = $222,015 − $217,600 = $4,415
Taxes = 0.35 * $4,415 = $1,545.25
Net income = $4,415 − $1,545.25 = -$2,869.75

The best choice would be to not add the new product, as its worst case scenario would result in a negative net income.

Webster United Is Considering Adding a New Product to Their