Question

In: Accounting

The factory capacity is 25,000 units per year, but demand is 40,000 units. You have an...

The factory capacity is 25,000 units per year, but demand is 40,000 units. You have an opportunity to buy equipment that will allow your company to meet the 40,000 unit annual demand. The equipment will only last 7 years and have no use or no value after that. The equipment costs $4,567,890 - plus 8.88% sales tax, 1.2% dealer fee, and $13,917 for title and license fees. The company will pay the equipment off interest free over the next 5 years. Annual payments will be equal and will include all taxes and fees. The current sales price is $199/unit and variable cost is $125/unit. The variable cost per unit will go down to $95/unit with the new equipment. The fixed costs of $960,000 per year will rise $300,000 with the cost of the new equipment. The contribution margin will increase $2 per year faster with the new equipment as compared with the old. Your cost of capital/investment threshold is 7.17%.

Solutions

Expert Solution

CALCULATION OF TOTAL COST OF EQUIPMENT-

COST OF EQUIPMENT $4567890
ADD:- SALES TAX ( 4567890*.0888) 405629
ADD:- DEALER FEES ( 4567890*.012) 54814
ADD :- LICENCE FEES 13917
TOTAL COST OF EQUIPMENT $5042250

CALCULATION OF EQUAL ANNUAL INTEREST FREE PAYMENT

5042250/5= $1008450

CALCULATION OF OUTFLOW AND INFLOW

YEAR 1 2 3 4 5
EQUAL ANNUAL PAYMENT -1008450 -1008450 -1008450 -1008450 -1008450
INCREASE IN FIXED COST -300000 -300000 -300000 -300000 -300000

DEPRECIATION FOR 7 YEARS LIFE

(5042250/7)

-720322 -720322 -720322 -720322 -720322
TOTAL OUTFLOW -2028772 -2028772 -2028772 -2028772 -2028772

INCREASE IN CONTRIBUTION MARGIN

{(199-95)*40000}-{(199-125)*25000}

2310000 2310000 2310000 2310000 2310000
INCREASE IN MARGIN BY 2 PER YEAR 80000 160000 240000 320000
TOTAL INFLOW 2310000 2390000 2470000 2550000 2630000
NET FLOW 281228 361228 441228 521228 601228
COST OF CAPITAL @7.17% 0.933 0.871 0.812 0.758 0.707
NET SAVING $262413.0 $314510.4 $358462.2 $395090.8 $425248.6

TOTAL SAVING AFTER BUYING THE EQUIPMENT WILL BE $1755725

SO THIS PROJECT WILL BE VIABLE


Related Solutions

You have the following information regarding AJH Company: Sales 25,000 units per year at $45 per...
You have the following information regarding AJH Company: Sales 25,000 units per year at $45 per unit Production 30,000 units in 2004 At the beginning of 2004 there was no inventory. Direct Materials are $12.00 per unit Direct labor is $10.00 per unit Variable manufacturing overhead costs are $8.00 per unit Fixed manufacturing overhead costs are $150,000 per year Marketing costs are all variable at $3.00 per unit Administrative costs are all fixed at $75,000 per year Required: (a.) Prepare...
ABC Company makes 40,000 units per year of a part it uses in the products it...
ABC Company makes 40,000 units per year of a part it uses in the products it manufactures. The per unit product cost of this part is shown below: direct materials .............. $15.30 direct labor .................. 24.70 variable overhead ............. 2.10 fixed overhead ................ 27.40 total ......................... $69.50 An outside supplier has offered to sell ABC Company 40,000 units of this part a year for $66.10 per unit. If ABC Company accepts this offer, the facilities now being used to make...
Aholt Company makes 40,000 units per year of a part it uses in the products it...
Aholt Company makes 40,000 units per year of a part it uses in the products it manufactures. The unit product cost of this part is computed as follows: Direct materials $11.30 Direct labour 22.70 Variable manufacturing overhead 1.20 Fixed manufacturing overhead 24.70   Unit product cost $59.90 An outside supplier has offered to sell the company all of these parts it needs for $46.20 a unit. If the company accepts this offer, the facilities now being used to make the part...
Your shoe factory has a production capacity of 10,000 units per month. Your fixed costs are...
Your shoe factory has a production capacity of 10,000 units per month. Your fixed costs are $200,000, your variable cost of production is $30 and you sell each pair for $35. The problem is that this requires you to sell 40,000 pairs of shoes each month just to breakeven – which is physically impossible given your production capacity. Assuming that you will always be able to sell out your current production capacity, which of the following changes would allow you...
The capacity for regular time production is 200 units per month. Overtime capacity is 100 per...
The capacity for regular time production is 200 units per month. Overtime capacity is 100 per month. Subcontracting is also available. The demand forecast is 100, 400, and 300, for month 1, month 2, and month 3, respectively. The per-unit cost for regular time production, overtime production, and subcontracting is $1, $2, and $3, respectively. Inventory cost is $1 per unit per period (on average inventory). The beginning inventory for the first period is zero. Develop a chase strategy (under...
The owners have set a target profit of $25,000 per month ($300,000 per year) in order...
The owners have set a target profit of $25,000 per month ($300,000 per year) in order from them to devote themselves full-time to JW Sports Supplies. Evaluate each of the following factors, separately (assume 1500 units at 100 each, y=60x +40000): a. What price must the company set to achieve a profit of $25,000? b. What must the variable cost per unit be to achieve a profit of $25,000? c. How many units must it sell to achieve a profit...
You are offered an annuity investment that will pay you $ 25,000 per year for 10...
You are offered an annuity investment that will pay you $ 25,000 per year for 10 years     beginning in 20 years. These payments will be made at the beginning of each year and your discount rate is expected to be 8%. You will need to make payments at the end of each year for the next 20 years (also at 8%) in order to receive the annuity investment. What is the present value of the annuity investment as of...
6. You are saving for a new house and you put $25,000 per year in an...
6. You are saving for a new house and you put $25,000 per year in an account paying 4.5%. The first payment is made today. A.) How much will you have at the end of 3 years? (Show Work) B. Also build a table/schedule to show your account each year (include beginning balance and ending balance each year, interest earned).
Demand averages 20,002 units per year and operates 365 days per year. Holding cost= $5 per...
Demand averages 20,002 units per year and operates 365 days per year. Holding cost= $5 per unit per year while the ordering cost is $100 per order. Company is currently using a periodic (P) inventory system, holding 1000 units in safety stock to cover demand uncertainty and placing orders for every 73 days. The company is investigating the possibility of using a continuous review (Q) inventory system with holding 15 units in safety stock to cover demand uncertainty. Use the...
Assume you have a product with the following parameters: Annual Demand = 360 units Holding cost per year = $1.00 per unit Order cost = $100 per order
Assume you have a product with the following parameters: Annual Demand = 360 units Holding cost per year = $1.00 per unit Order cost = $100 per order a) What is the EOQ for this product?b) In addition, assume a 300-day work year, how many orders should be processed per year? c) What is the expected time between orders?
ADVERTISEMENT
ADVERTISEMENT
ADVERTISEMENT