Items 1 and 2 are based on the following information:
Ethan, Inc. has seasonal demand for its products and management is considering whether level production or seasonal production should be implemented. The firms’ short-term interest cost is 8%, and management has developed the following information to make the decision:
|
Alternative 1 Level production |
Alternative 2 Seasonal production |
|
|
Average inventory |
$2,000,000 |
$1,500,000 |
|
Production costs |
$6,000,000 |
$6,050,000 |
Which alternative should be accepted and how much is saved over the other alternative?
- Alternative 1 with $500,000 in savings.
- Alternative 2 with $50,000 in savings.
- Alternative 2 with $10,000 in savings.
- Alternative 1 with $10,000 in savings.
At what rate of short-term interest rate would the two alternatives have the same cost?
- 6%
- 9%
- 10%
- 12%