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.

1. For each scenario (Venus' proposal and Aphrodite's proposal), show the annual cash flows and the NPV of the project.

2. For each scenario detailed above (current scenario, Venus' proposal and Aphrodite's proposal), create an Income Statement for each year of the project.

3. How much could the company spend on the equipment and earn a $100,000 NPV just Venus' plan?

Answer 1