Elite Products Inc. manufactures fuel injection systems for high

performance V8 engines. The systems can be used on any make of car by installing the correct software chip for that make. The company is currently at 80% of capacity manufacturing 30,000 systems per year. The systems sell for $1,200 each and are sold to independent high performance retail auto part stores. Elite Products Inc. has been approached by HighSpeed Auto Inc. a large auto parts chain to provide them with the fuel injection system. In contract negotiation the chain has agree to purchase 7,500 systems which will get Elite Product's production to full capacity. However, HighSpeed Auto Inc. wants a ten percent quaintly discount on the additional 7,500 systems it purchases or it will not enter into the contract.

The current manufacturing costs for the systems are as follows:

Raw material: $575/unit

Direct labor: $150/unit

Variable Mfg. OH: $ 80/unit

Fixed Mfg OH : $9,000,000/year

Other costs of the company are as follows:

Variable Selling Exp : $ 6/unit

Variable G&A Exp: $ 1/unit

Fixed Selling Exp: $2,000,000/year

Fixed G&A Exp: $1,500,000/year

Since Elite Products will be increasing production by twenty percent the following cost will change. Fixed manufacturing overhead will increase by $140,000 per year because of higher electrical usage. Because of a sales commission break to be paid for any units sold above 30,000 per year variable Selling expense will increase by $2 per unit for the additional 7,500 units only. Raw Material cost will drop to $517 per unit for the additional production only because of a quantity discount from the firm's vendors on orders over 30,000 units.

Required:

39 pts

Prepare a Contribution Margin Income Statement for the firm prior to

and after accepting the contract. Use the template or the attached Excel emplate provided

	CURRENT POSITION W/O CONTR.			CHANGE			TOTAL WITH
REVENUE/COST	UNITS	PRICE/COST	TOTAL	UNITS	PRICE/COST	TOTAL	CONTRACT

2. Domco manufactures small gasoline engines for the home gardening

power tool industry. Their production line for 8hp engines is very labor intensive. The company has an opportunity to produce 8hp engines for all of Sears Craftsman small garden power products that require an 8 horsepower rating.

In order to increase production Domco will have to install a new automated production line. The engineering estimate for the cost of the new production facility is $12,500,000. If the new production line is installed, it is estimated that Domco will save $1,000,000 per year in direct labor cost. All other variable cost per unit will remain the same.

The Sears contract is for 5 years and will be renewed at the end of that time if both parties agree. The Sears contract will increase sales in 8hp engines by 30% per year. The current sales price per engine is $48 with a total volume of 800,000 units sold per year.

Variable cost amount to 32% of the sales price per engine exclusive of direct labor cost. If the new production line is installed the old production line will be dismantled and scraped (sold) for $45,000 and will have a realize loss for tax purposes of $280,000. If the old line were not sold today it could be sold for $25,000 at the end of its life in five years.

The old production line was put into servers 10 years ago at a cost of $975,000 and was being depreciate over a 15 year life using straight line depreciation without taking salvage value into consideration. The new production line will be depreciated over 5 years using straight line depreciation without taking salvage value into consideration.

If Domco goes ahead with the project, the company will use funds currently available to pay for the new line. The new production line can be scraped (sold) for $175,000 five years from today. Since no salvage value has been use in the depreciation calculation for the equipment the entire amount a taxable gain.

Required: (36pts)

Use the Template provided or an Excel spreadsheet to calculate the after tax cash flows assuming a 48% marginal tax bracket for Domco. Do not total the cash flows and Do not calculate the present values of the after-tax cash flows

CASH IN FLOWS	CFBT	CFAT	TODAY	YR1	YR2	YR3	YR4