With the possibility of the US Congress relaxing restrictions on cutting old growth forests, Timber Lumber Company is considering an expansion of its facilities. The company believes it can sell lumber for $0.18 per board foot. A board foot is a measure of lumber. The tax rate for the company is 34.5%. The company is presented with the following four independent opportunities: Build factory A with annual fixed costs of $22 million and variable costs of $0.10 per board foot. The factory has an annual capacity of producing 500 million board feet. Build factory B with annual fixed costs of $11 million and variable costs of $0.12 per board foot. The factory has an annual capacity of producing 300 million board feet. • Build factory C with annual fixed costs of $14 million and variable costs of $0.11 per board foot. The factory has an annual capacity of producing 400 million board feet. Required: 1. What is the break-even point of production in board feet for factory A? 2. If the company desires to generate a before tax profit of $1.5 million with factory B, how many board feet would the company have to process and sell? 3. If the company desires to generate an after tax profit of $2.5 million with factory C, how many board feet would the company have to process and sell? 4. Which factory exposes Timber Lumber Company to a higher level of risk and what is your rationale?
With the possibility of the US Congress relaxing restrictions on cutting old growth forests, Timber Lumber Company is considering an expansion of its facilities. The company believes it can sell lumber for $0.18 per board foot. A board foot is a measure of lumber. The tax rate for the company is 34.5%. The company is presented with the following four independent opportunities: Build factory A with annual fixed costs of $22 million and variable costs of $0.10 per board foot. The factory has an annual capacity of producing 500 million board feet. Build factory B with annual fixed costs of $11 million and variable costs of $0.12 per board foot. The factory has an annual capacity of producing 300 million board feet. • Build factory C with annual fixed costs of $14 million and variable costs of $0.11 per board foot. The factory has an annual capacity of producing 400 million board feet. Required: 1. What is the break-even point of production in board feet for factory A? 2. If the company desires to generate a before tax profit of $1.5 million with factory B, how many board feet would the company have to process and sell? 3. If the company desires to generate an after tax profit of $2.5 million with factory C, how many board feet would the company have to process and sell? 4. Which factory exposes Timber Lumber Company to a higher level of risk and what is your rationale?
Chapter1: Financial Statements And Business Decisions
Section: Chapter Questions
Problem 1Q
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Answer only question 4
Transcribed Image Text:With the possibility of the US Congress relaxing restrictions on cutting old growth
forests, Timber Lumber Company is considering an expansion of its facilities. The
company believes it can sell lumber for $0.18 per board foot. A board foot is a measure
of lumber. The tax rate for the company is 34.5%. The company is presented with the
following four independent opportunities:
Build factory A with annual fixed costs of $22 million and variable costs of $0.10 per
board foot. The factory has an annual capacity of producing 500 million board feet.
Build factory B with annual fixed costs of $11 million and variable costs of $0.12 per
board foot. The factory has an annual capacity of producing 300 million board feet.
• Build factory C with annual fixed costs of $14 million and variable costs of $0.11 per
board foot. The factory has an annual capacity of producing 400 million board feet.
Required:
1. What is the break-even point of production in board feet for factory A?
2. If the company desires to generate a before tax profit of $1.5 million with
factory B, how many board feet would the company have to process and sell?
3. If the company desires to generate an after tax profit of $2.5 million with
factory C, how many board feet would the company have to process and sell?
4. Which factory exposes Timber Lumber Company to a higher level of risk and
what is your rationale?
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