I(john doe) as a senior consultant for a firm called BUSI 1083 LLP. I have been asked by L. Donovon(controller of west division of Excalibur ltd) to help choose one of 3 options. The report is to be submitted to CEO in 3 days for expenditure budgeting for year 2014. It is Jason head of plant engineering west division of Excalibur ltd who gave 3 options to L. Donovon which was then passed to me for consideration. Note: Current Ice crusher machine and ice cream company are same company.

The options are to do following with an outdated ice crusher machine:

build a general purpose ice crusher machine;

buy a numerically controlled special ice crusher machine; or

buy a general purpose ice crusher machine.

The sales of its ice cream company was $35 million. Sales were 12 million in 2012. Full time employees work 2,000 hours in the ice cream division.

The income statement for Excalibur for 2013 is as follows.

Sales

$22,364,000.00

COGS

$14,760,240.00

Gross Profit

$7,603,760.00

Selling and admin Costs

$3,578,760.00

Allocated Costs (based on sales)

$1,677,300.00

Income Before Income Taxes

$2,347,700.00

Return on Sales - 10.5%

Return on Investment - 8.5%

Investment (cost based on historical value)

$27,626,118.00

Jason has pointed out to Donovon that the existing machine is outdated and maintenance cost is getting too high. Jason states that maintenance of new general purpose machine is 26,000 while special purpose machine can save 14,000 in maintenance. Insurance for general purpose machine would drop to $3,000 while for special machine purpose would be 67% higher than general purpose machine. The current machine has no market or salvage value and its book value is 0. Therefore which option must be chosen as history of each option is given below.

1.Build a general purpose ice crusher machine:

This machine could be build in west division. The division is below capacity at present as a major contract has completed. The machine can be built in west division without affecting revenue-producing activity, but it will take six months to complete. The machine can last max 5 years but there will be no salvage value after that because removal cost is equal to selling price at that time. Following are the cost estimates.

Parts and materials

$55,000

Direct labor (DL.in dollars)

$90,000

Variable overhead (50% of D.L in dollars)

$45,000

Fixed overhead (25% of D.L in dollars)

$22,500

TOTAL

$212,500

Donovan suggests that this job also bears a proportion of administrative costs mainly $12,000.

2.Buy a special purpose machine:

the advantage of buying special purpose machine is that only a single operator is required and output per hour could increase by 25%. Maintenance costs decrease due to microchip circuitry.

this state of art machine needs training of operators. In total 26 weeks at suppliers factory in florida where the machines operations are taught to current employees at Excalibur. while the training is going on the supplier provides an operator to work the machine free of cost. Expected costs of training period including hotel and travel will cost $3000 per week excluding the operator's labor which is set at $15 per hour.

The cost of the new machine is 625,000 and the salvage value is $25,000 at the end of 5 years. It is available immediately. This machine could generate sales of 243,750 annually at full capacity and requires 19500 in direct material cost. While the direct material costs are same as general purpose, the level of sales are $48,000 lower for general purpose machine than special purpose machine.

3. Buy a general purpose machine:

the purchase price of this machine is 295,000 and costs levels associated with the machine are same as general purpose machine built by the company because the technology is similar.

The purchase price of this machine is $295,000 and cost levels associated with the machine are expected to be the same as the general purpose machine built by the company because the technology is similar. The salvage value of the machine net of removal costs, is $5,000 in five years.It can be delivered immediately.

General comments

The required rate of return for this investment class has been set at 8%

Required

Prepare the budget submission to Kevin.

1.Quantitative Analysis(40%): push number to relevant issues at hand by differentiating it from irrelevant.

2.Qualitative Analysis(30%): analyze qualitative issues by discussing alternatives in light od key success factors to check which alternative solves the problem.

3.Recommendation on Course of Action(5%):State your recommendation. State justification based on quantitative and qualitative analysis. The recommendation must suit the above mentioned data.

4.Circumvention of Potential Problems(5%): If there could be problems with your recommendations, state them. As well, suggest ways to overcome these problems like a contingency plan