A small group of investors is considering starting a small premixed- concrete plant in a rapidly developing suburban area about 15 miles from El Paso, Texas. The group believes that there will a good market for premixed concrete in this area for at least the next 10 years and that if they establish such a local plant, it will be unlikely that another local plant would be established. Existing plants in El Paso would, of course, continue to serve this new area. The investors believe that the plant could operate at about 75% of its maximum design capacity. The plant would operate 250 days per year, because it is located in an area where the weather is mild throughout the year.

The plant will cost $750,000; its market value at the end of 10 years is estimated to be $250,000, which is the value of the land. To deliver the concrete, four secondhand trucks would be acquired, costing $21,000 each, having an estimated life of six years and a market value of $8,000 each at the end of that time. The four truck drivers are going to be paid a fixed amount of $80.00 per day each, plus an additional payment of $0.50 per yard3 of concrete delivered. In addition to the drivers, four people would be required to operate the plant and office at a total cost of $360.00/day. Annual operating and maintenance expenses are estimated for the plant and office at $27,000 and for each truck at $5,250. Raw material costs are estimated to be $27.00 per cubic yard of concrete. Payroll taxes, vacations, and other fringe benefits would amount to 25% of the annual fixed payroll. Annual taxes and insurance on each truck would be $950, and taxes and insurance on the plant would be $2,100/year. The investors would not contribute any labor to the business, but a manager would be employed at an annual salary of $36,000.

Delivered, premixed concrete is currently selling for an average of $95 per cubic yard. A useful plant life of 10 years is expected, and capital invested elsewhere by these investors is earning about 15% per year before income taxes.

A. What is the minimum amount of concrete (in yard3 /day) that the plant would need to produce and sell in order for the project to be an attractive investment opportunity? (the breakeven point)

B. If the designed capacity is three times the breakeven point, and if, ss stated before, the original idea is to have the plant operating at 75% of its design capacity, what would be the profits for the investors at that operating level?

C. What is the % of increase in total expenses for the plant if the operation capacity increases from 75% to 90%? And what is the % of increase in profits?

D. Because of anticipated pressures from current competitors, the investors are considering the possibility of having to reduce the selling price of the product at some point. At an 80% capacity utilization, what is the minimum selling price of the product (in $/yard3) that the company could go and still make a profit?