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Capital Budgeting Raisin the Roof manufactures premium chocolate-covered raisins. The chocolate for the raisins comes in bars and can be made internally or outsourced. However,

image text in transcribedimage text in transcribed Capital Budgeting Raisin the Roof manufactures premium chocolate-covered raisins. The chocolate for the raisins comes in bars and can be made internally or outsourced. However, the machine used by Raisin the Roof to produce the chocolate is nearing the end of its useful life. The current manufacturing costs of a chocolate bar are as follows: Cacao pods (Direct materials) Direct labour Variable manufacturing overhead Variable administrative costs $21.25 per bar $17.00 per bar $8.00 per bar $7.00 per bar Other costs related to the production of chocolate bars: Supervisor's salary $230,000 per year Depreciation on capital assets $360,000 per year Fixed administrative costs $400,000 per year The production plant can produce 100,000 raisin boxes per year. This will require 65,000 bars of chocolate. The company currently sells 20,000 bars of chocolate to external customers for $71 per bar. When it does this, it requires additional variable selling costs of $4 per bar. The CEO has asked that the company prioritize internal demand first. An external supplier has approached the company and offered to produce chocolate bars at a cost of \$69 per bar. They can provide this guaranteed price for five years. The external supplier guarantees on-time delivery and will pay a penalty of 25% of revenue on late shipments. The external supplier can provide Raisin the Roof with up to 90,000 units annually. Raisin the Roof can purchase a new machine for chocolate production at a cost of $4,600,000. The new machine will reduce direct labour costs by 10% and last for 5 years. Its residual value at the end of the 5 years is estimated to be $150,000. Assume that this is a class 53 asset for tax purposes, with a CCA of 50%. The capacity of this new machine will be 100,000 bars per year. The corporate tax rate is 35% and the company requires a 10% return, after tax, on this investment. Demand for the chocolate bars requires 65,000 bars of chocolate per year for the next 3 years. This will increase to 70,000 bars of chocolate in years 4 and 5 . The company expects sales of chocolate bars to external customers will be 18,000 bars per year for the first three years and will increase to 25,000 units per year for the last two years. Management estimates that 40% of the supervisory costs and $100,000 of general administrative expenses would be eliminated if the chocolate bar production was outsourced. Required: Should the company buy the new machine and make the chocolate bars or outsource production of the chocolate bars? Prepare a quantitative (using NPV) and qualitative analysis

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