Question
For this activity, you have been hired as a team of consultants on a multi-year basis for a global washer and dryer manufacturer. They currently
For this activity, you have been hired as a team of consultants on a multi-year basis for a global washer and dryer manufacturer. They currently offer two core washer and dryer sets: a high-end model and an economic model. You are tasked to complete several calculations and present your findings to the company stakeholders.
1.For your first assignment, management has provided the following revenue and cost information:
High-End Set: sales price 3500 per unit
Labor 875 per unit
Materials 1400 per unit
Direct fixed cost 25000 per unit
Allocated fixed cost 85000 per unit
Economical set: sales price 1000 per unit
Labor 250 per unit
Materials 300 per unit
Direct fixed cost 16500 per unit
Allocated fixed cost 85000 per unit
They want a better understanding of their business to make budgeting and sales goals decisions and have asked you to determine their:
- Break-even quantities for each product line
- Break-even quantities to earn $500,000 per year margin on the high-end line (at the current sales price)
- Break-even quantities to earn $300,000 per year margin on the economical line (at the current sales price)
They expect the product lines to fully absorb the costs allocated to them.
Once you have determined these amounts, they have asked that you:
- present the information
- describe how you performed your calculations
- and explain what the results mean
2. Later, the company is considering the purchase of machinery and equipment to set up a line to produce a combination washer-dryer. They have given you the following information to analyze the project on a 5-year timeline:
- Initial cash outlay is $150,000, no residual value.
- Sales price is expected to be $2,250 per unit, with $595 per unit in labor expense and $795 per unit in materials.
- Direct fixed costs are estimated to run $20,750 per month.
- Cost of capital is 8%, and the required rate of return is 10%.
- They will incur all operational costs in Year 1, though sales are expected to be 55% of break-even.
- Break-even (considering only direct fixed costs) is expected to occur in Year 2.
- Variable costs will increase 2% each year, starting in Year 3.
- Sales are estimated to grow by 10%, 15%, and 20% for years 3 - 5.
They have asked you to calculate:
- The product's contribution margin
- Break-even quantity
- NPV
- IRR
Once you have determined these amounts, they have asked that you present the information, describe how you performed your calculations, and explain what the results mean.
After you have completed the calculations and presented your work, management makes the investment.
- Explain how the project analyses do or do not support this decision.
- In either case, what are the factors that should have been considered in management's decision?
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