Question

You are an eager and ambitious young graduate of the Reginal F. Lewis College of Business at Virginia State University with a new Accounting degree and a great life ahead of you. One of your closest friends is an inventor and an entrepreneur who wants to start a business selling a break-through new drywall screw that he has invented and that he believes works much better than the drywall screws currently on the market. He wants to start the business by opening a factory to produce the screws which can then be sold to either wholesalers or retailers who will then sell them to the general public. After searching all over creation for the right sized building in the perfect location to properly meet the needs of his target customers, he found that the ideal building in which to put up his factory was right here in Petersburg all along.                                            

To begin, he was able to purchase the building he needed outright for $730,000. Useful life of the building is 50 years and it is depreciated on a straight-line basis. Estimated salvage value is $30,000. Property taxes on the building each year are $5,500.                                                                                                                                                                                                               

There is a new machine that another fellow VSU grad has invented that takes the metal for the screws and molds them into their proper size and shape, and takes the plastic for the anchors and molds them into their proper size and shape; an assembly line is attached to the machine where workers put the screws and anchors into boxes. The finished product is a box of 32 drywall screws and their plastic anchors that work unlike any that have come before them. He purchased this machine outright for $175,000. The machine has a useful life of 25 years with no residual value and is depreciated on a straight-line basis. The machine can produce 10,750 boxes of screws and anchors per year. He is sure that he can sell every unit produced.                                                                                                                                                                                                                                      

It is determined that to produce the 32 screws in each box will require 80 ounces of metal which is the only material used to make the screws and to produce the 32 anchors in each box will take 40 ounces of plastic which is the only material used to make the anchors. The metal you need is produced by multiple suppliers and you've found one so far that will allow you to buy it at $1.45 per pound. The plastic used is also produced by multiple suppliers and you've found one so far that will allow you to buy it at $.20 per pound. It takes 12 minutes for the workers on the assembly line to box the screws and anchors because they are put in there in a way that prevents them from becoming disorderly. This is part of the quality aspect of the product. Assembly line workers are paid at a rate of $17.00 per hour.                                                                                                                                    

Your friend hired a Vice President (VP) who has a degree in Marketing from VSU. She did some market research and determined that in order to be competitive with your new product you are going to charge $24.00 per box of screws and anchors. The Vice President is paid $52,750 per year. He also hired a Chief Operating Officer who will be paid $52,750 per year. Your friend has also asked you to serve as a consultant to his company to make sure that the business

Answer 1

Based on the given information, we are computing the profitability of the new business. We have split the costs into Variable costs and fixed costs for easy analysis. Also we have made our profitability calculation on basis of 10750 box of screws since there is enough market to consumed the entire amount of produce from the machine capacity.

Please find the computation below (I have provided Calculation column for easy understanding of the problem:

		Units =	10750 box
Particular	Calculation	Amount $	Amount $
Selling Price	10750 box * $24/box		2,58,000.00
Variable Cost
Raw material cost: Metal	80*10750/16 ounce per pound*$1.45/pound	77,937.50
Raw material cost: Plastic	40*10750/16 ounce per pound*$0.20/pound	5,375.00
Labour cost	10750 box * 12min/box /60mins *17/hour	36,550.00
			1,19,862.50
Contribution			1,38,137.50
Fixed Cost
Building Depreciation	(730000-30000)/50	14,000.00
Property Taxes - Building		5,500.00
Machine Depreciation	175000/25	7,000.00
Salary - V.P.		52,750.00
Salary - COO		52,750.00
			1,32,000.00
Net Profit			6,137.50