Baldwin has a new design for their Product Brat next round that can reduce their material cost of producing units from $8.14 to $7.32. Baldwin passes on half of all cost savings by cutting current price to customers. For simplicity: -Use current labor cost of $5.42-Assume all period costs as reported on Baldwin's Income Statement (Annual Rpt Pg2) will remain the same. how many units (000) of product Brat would need to be sold next round to break even on the product. 1414 units 1132 units 1521 units 1839 units 733 units 1322 units It offered a worst case situation. Your team is in round 7, the next to last round. If you buy capacity, you can only use it in round 8. If you do not buy it, you will stock out, so you are guaranteed to use the capacity next round. Should you buy the capacity? Justify your decision with your calculations. Our production line is automated to 7.0. Additional capacity costs $6+7.0* $4 = $34 per unit. Our price is $31.50 Material costs are $12.00 Labor on first shift costs $6.00. On second shift $9.00. We will borrow all the money required to fund the purchase at 14%. We must carry two years of interest payments of $4.76 each. Depreciation is straight line over 15 years, or $2.27 per year, commencing in the second year. SG&A expenses are irrelevant. If we do not add the capacity, we will still spend for our SG&A. Adding new capacity does not increase R&D, Promo, Sales budgets, etc. Most important, we are confident our plant utilization will approach 200% (two shifts). Baldwin has a new design for their Product Brat next round that can reduce their material cost of producing units from $8.14 to $7.32. Baldwin passes on half of all cost savings by cutting current price to customers. For simplicity: -Use current labor cost of $5.42-Assume all period costs as reported on Baldwin's Income Statement (Annual Rpt Pg2) will remain the same. how many units (000) of product Brat would need to be sold next round to break even on the product. 1414 units 1132 units 1521 units 1839 units 733 units 1322 units It offered a worst case situation. Your team is in round 7, the next to last round. If you buy capacity, you can only use it in round 8. If you do not buy it, you will stock out, so you are guaranteed to use the capacity next round. Should you buy the capacity? Justify your decision with your calculations. Our production line is automated to 7.0. Additional capacity costs $6+7.0* $4 = $34 per unit. Our price is $31.50 Material costs are $12.00 Labor on first shift costs $6.00. On second shift $9.00. We will borrow all the money required to fund the purchase at 14%. We must carry two years of interest payments of $4.76 each. Depreciation is straight line over 15 years, or $2.27 per year, commencing in the second year. SG&A expenses are irrelevant. If we do not add the capacity, we will still spend for our SG&A. Adding new capacity does not increase R&D, Promo, Sales budgets, etc. Most important, we are confident our plant utilization will approach 200% (two shifts)
