Question

You are in charge of a manufacturing firm that is contracted to manufacture molds for producing jewelry for a leading retail store. Your firm did a market assessment last year for 200k to determine what is involved in producing the molds, and have received a total of 100k over the past two years in contract work similar to this. This new contract that you just signed pays you to produce 50 simple jewelry designs, and 5 complex jewelry designs. Your internal costs to do designs are: 518.2 in material for each mold (simple or complex) 198.48 in labor costs for each simple mold $523.1 in labor costs for each complex mold A fixed overhead cost of $200 per mold for the simple designs and $500 per mold for the complex designs In addition, the complex molds require an artist who you have to hire for $113.52 per hour to process the molds. You can assume that the average complex part requires 10 hours of labor per mold. If the contract pays you 100k for this, what is the net profit of the contract? Type this answer in the box below. If you repeat this operation each year and your costs stay the same (i.e. as above) for 5 years, but the contract price increases by 10k per year, what is the present worth of this situation over the 5 years if your cost of capital is 5%?

Answer 1

For the production of simple and complex molds, we are given various details as summarised in the table below,

For the given contract, 100k is offered (Contract payment).

For computing the above,

TC of 1 simple mold = Material cost + Labor cost + Fixed overhead

TC of 50 simple molds = 50*(TC of 1 simple mold)

Similarly,

TC of 1 complex mold = Material cost + Labor cost + Fixed overhead + ( Artist cost * No. of hours per mold)

TC of 5 complex molds = 5 * (TC of 1 complex mold)

Now,

TC of the contract = TC for 50 simple molds + TC of 5 complex molds

and, Net profit = Contract payment - TC of the contract

Thus, Net profit = 40,783.5

Further, for the computation of PV of the contract, going on for 5 years, we compute the cash flows, taking into consideration the 10k increase every year in contract cost.

For the computation of PV of the cash flow,

Where, P = Cash flow (i.e. Contract cost) and,

r = cost of capital

Thus, PV of the contract = 520,078.7