Question
Bill's Boots produces cowboy boots in three factories located in Atlanta, Fort Worth and Tucson. Bill's Boots currently deals with four distributors of its products:
Bill's Boots produces cowboy boots in three factories located in Atlanta, Fort Worth and Tucson. Bill's Boots currently deals with four distributors of its products: BillyBob, DudeWear, Slickers, and CJ's. Bill's Boots has recently signed on two more distributors to start at the beginning of 2016. With the addition of these distributors, BigD and MusicCity, demand for product will be more than the existing factories can produce. Bill's Boots must increase capacity and is considering three possible capital projects: building a new factory in Memphis, building a new factory in Nashville, or building both new factories. When building the new factories, existing factories can be closed. Your group has been charged with deciding which project to proceed with.
The marketing department has forecasted (with input from the distributors) the demand for 2017 It is expected that these demands will remain stable for the following 2 years as well. (The demand is the same for 2017, 2018, and 2019.)
Distributor | Yearly Demand (units) |
BillyBob | 27,800 |
DudeWear | 15,500 |
Slickers | 16,250 |
CJ's | 26,000 |
BigD | 25,000 |
MusicCity | 17,000 |
Table 1: Expected Demand 2014-2018
The next table contains the accounting department's cost analysis of the existing factories and the two possible new factories.
Factory | Production Cost ($ per unit) | Fixed Cost | Capacity (units) |
Atlanta | 25.00 | $750,000 | 25,000 |
Fort Worth | 32.00 | $650,000 | 30,000 |
Tucson | 29.00 | $600,000 | 36,000 |
Memphis | 23.00 | $590,000 | 37,000 |
Nashville | 24.00 | $675,000 | 25,000 |
Table 2: Factory Information
Memphis and Nashville will have cheaper variable costs because they will use state-of-the-art technology.
The accounting department has also determined the expected shipping costs between Billy's Boots factories the distributors' warehouses. These are presented in the next table.
BillyBob | DudeWear | Slickers | CJ's | BigD | MusicCity | |
Atlanta | $2.50 | $3.15 | $3.50 | $1.50 | $1.75 | $2.30 |
Fort Worth | $4.95 | $1.75 | $2.25 | $4.00 | $1.50 | $4.50 |
Tucson | $1.05 | $2.50 | $1.20 | $2.75 | $1.25 | $6.60 |
Memphis | $5.30 | $4.00 | $3.35 | $1.75 | $2.50 | $1.25 |
Nashville | $6.20 | $4.50 | $2.35 | $2.00 | $5.25 | $0.75 |
Table 3: Shipping Cost (in $ per unit) Between Factories and Distributors
The expected revenue for each pair of boots sold is $97.
It is expected that construction costs will be $7,500,000 to build a new factory. These costs will be incurred in 2016. It is also expected that it will take the remainder of 2016 to build a new factory. Output from any new factory won't be online until the beginning of 2017. This is acceptable because the new distributors won't start until the beginning of 2017.
Closing a factory will cost $1,900,000 per factory. Any factory closing will commence 1/1/2017 and be completed in the first quarter..
Analyze the two projects. Identify which project to pursue.
To aid you in this capital budgeting decision, the accounting department has provided you with a discount rate of 12%.
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