Acme Manufacturing produces 3 types of consumer products - a Student model, an Adult model, and an Expert model.

Despite operating at capacity, the Company's president is very upset at current results and is considering some changes. December 31, 2019 results are shown below:

Alternative #1

The President feels that the DLH per product could be reduced by 40% by acquiring some extra rental space and hiring another employee to clean up and control inventory. The rental space would cost $1,000 per month and the additional employee would cost $2,000 per month.

The President feels that since the company is operating at capacity, the company could increase all selling prices by 10% and the market for their products would be the following amounts per year:

Student - 100 units

Adult - 100 units

Expert - 50 units

The President feels that these figures will hold for the next 5 years.

Alternative #2

The President has been approached by a customer to purchase most of the company's product line for the next 5 years. The customer would like to purchase 350 Student models and 350 Adult models per year at a price of $1,200 and $1,650, respectively.

The company does not have the capacity to fill these orders and will therefore use an outside supplier to provide all of the Student and Adult products at the following prices:

• ? Student - $1,100
• ? Adult - $1,500

The company would then continue to make and sell 155 Expert products per year for the next 5 years and sell them at a price of $3,000 each.

Required

Prepare an analyse for the President that evaluates these 2 alternatives over the next 5 years and make a recommendation as to which alternative the President should choose. Ignore income taxes. The company's discount rate is 12%.

What are some of the qualitative factors that the President must consider when selecting an alternative?

Student Adult Expert Total Direct Labour Hours (DLH) available 4,725 DLH per unit 35 35 35 Revenue per unit 1,800 2,450 2,750 COGS per unit Frame 160 160 300 Parts 855 1,300 1,800 Paint 40 40 75 Direct labour cost 700 700 700 Overhead - variable (1) 70 70 70 1,825 2,270 2,945 GM per unit (25) 180 (195) Units sold 70 50 15 GM per product line (1,750) 9,000 (2,925) 4,325 Selling costs 4,500 General and administration 19,500 Loss (19,675) (1) Applied on the basis of DLH