Question

Cupid Company sells boxes of chocolates. They currently offer two different types, heart shaped and cupid shaped. They sell 8,750 cupid shaped boxes for $18.75 and 10,000 heart shaped boxes for $15.00 each. Cupid Company has $18,000 of fixed costs (non-plant). Both boxes currently have an extremely manual manufacturing process. The cupid shaped box costs $7.50 each to make, comprised of $1.50 in variable overhead, $2.10 in direct materials, direct labor cost $8.15 per hour and it takes employees 28.72 minutes per box. The heart shaped box costs $6.00 each to make, comprised of $1.50 in variable overhead, $1.58 in direct materials, $8.15 per hour for direct labor; it takes employees 21.5 minutes per box.

One of the employees, Venus, proposed a cost savings plan. Her plan was to purchase a new chocolate picking machine, which would cut direct labor by 40%. The machine costs $785,000 and would last the company 6 years with a $20,000 salvage value. They would be able to sell the machine at the end of six years for $35,000.

Venus was discussing her plan with a co-worker, Aphrodite. Aphrodite believed that sales were currently constrained by available space and labor. She believed that in addition to reducing labor costs, Cupid Company would also be able to increase sales of each style by 5%. Additionally, she proposed a new product be offered; chocolate flower bouquets. The company would be able to see 3,200 units at $30 each. The cost would be $10.50 per bouquet, comprised of $1.50 in variable overhead, $7.00 in direct materials, $8.15 per hour for direct labor and it takes employees 14.73 minutes per bouquet. Additionally, fixed costs would increase by $5,000.

Cupid Company's desired rate of return is 15%, has a 30% tax rate and they use straight-line depreciation for all plant assets. All numbers provided are pre-tax.

For Venus' proposal show the annual cash flows and the NPV of the project. (On Excel Sheeet please)

Answer 1

Heart shaped and Cupid Shaped boxes
S.no	Particulars	Cupid shaped Boxes		Heart shaped Boxes
1	Number of boxes		8,750.00		10,000.00
2 = 1*3	Sales		$ 164,062.50		$    150,000.00
3	Seling Price per box		$            18.75		$              15.00
4	Cost per box		$              7.50		$                 6.00
5	Direct Material	$             2.10		$              1.58
6	Direct Labour	$             3.90		$              2.92
7	Variable OH	$             1.50		$              1.50
8 = 1*6	Total labour		$    34,134.92		$       29,204.17
Expense for the new machinery
	Cost of the machinery	$ 785,000.00
	Savage Value	$   20,000.00
	Life of the machinery in years	6
	Depreciation per annum	$ 127,500.00
Increase in sales due to the new machinery		5%
New sales		$ 314,062.55	(164,062+150,000) + 5%
New labour cost due to increased sales		$   63,339.13	(34,134.92+29,204.17)+5%
Savings in the exisitng process		$   25,335.65	(63,339.13*40%)
As per the question , if we purchase the new machinery we can also produce boquet's
New Project , Boquet
No of units		3200
Selling price per unit		$           30.00
Cost		$           10.50
Profit		$           19.50	(30 - 10.50)
Total profit		$   62,400.00	(19.5 *3200)
There fore total profit due to new machinery		$   87,735.65	(25,335+62,400)

While calculating NPV , we have to consider the out flow as well as inflow. There fore we are considering savings in the exisiting project after considering the increase in sales and profit due to new project. Calculation of NPV Cost of the machinery $ 785,000.00 Savings $    87,735.65 Present Value Annuity Factor for 6 years @15% 3.7845 NPV $(452,964.42) (87,735*3.7845)-785,000 Since the NPV is negative , we should not purchase the new machinery. Here as the cash flow is same every year we have taken present value annuity factor for calculating the cash flow.