PART 6: Baseball & Capital Budgeting

Alex & Co. had acquired the Red Sox several years ago and were always exploring ways to boost profits. Near the end of last season the Boston Red Sox, had test marketed a new type of caramel popcorn. Sales of the Sox Pop, as the product was referred too, skyrocketed and the stadium was always out of the product long before the 7th inning stretch. Sales of the Sox Pop were very promising and projected to be:

YR	Sales (000 s of units)	YR	Sales (000)s of units)
1	20,000	6	45,000
2	30,000	7	45,000
3	40,000	8	45,000
4	45,000	9	45,000
5	45,000	10	45,000

Because the Red Sox organization had introduced the product close to the end of last season and were unsure of how much they would be able to sell they purchased a used machine with limited production capability. Currently the Red Sox food service division employed a RAMCO 32x automatic popcorn popper and coater with the special caramel attachment. During Spring training the Red Sox continued to use the RAMCO product and quickly discovered that they were going to need more production capacity when the season got underway. Compounding the issue was the expectation attendance for the 2014 season would break all past records given the contract extension of Joe Fish and the anticipated arrival of their new pitching ace from North Dakota, JR Speedwagon. Some said Nolan Ryan was slow after witnessing JR pitch. To increase its productive capacity, the food service group is considering two alternatives for what they believe to be a 10 year project:

Alternative 1: The RAMCO 32X machine now in use was purchased used for $650,000 and has an estimated 6 more seasons of use. The present book value is $600,000 and Its present market value is $250,000.

Purchase a new RAMCO 32X for $1,180,000 and run the old and new together to meet demand. The old machine is currently 4 years old and would need to be replaced at the end of the 6th season at which time it would have a salvage value of zero. The replacement for the old machine would have an estimated cost of $1,500,000 and a salvage value equal to its book value at the end of the project.

A service annual contract for the repairs and maintenance of a RAMCO 32X popper will be purchased at a cost of $10,000 for each of the poppers.

Alternative 2:

Purchase a new RAMCO 64X popper for $3,000,000 with an estimated 10 year life and no salvage value at the end of 10 years. The company could purchase a RAMCO 64X popper and sale the old machine for the current market value. The RAMCO 64X machine is a high-speed unit with double the capacity of the RAMCO 32X popper.

The RAMCO 64X popper is more costly to maintain than the RAMCO 32X popper. A service contract to cover repairs on the RAMCO 64X popper would be purchased at $15,000 per season.

The following general information is available on the two alternatives:

Both the RAMCO 32X popper and the RAMCO 64X popper have a 10-year life from the time they are first used in production. The scrap value of both machines is negligible and can be ignored. Straight-line depreciation is used by the company.

The two machine models are not equally efficient. Comparative variable costs per unit of product are as follows:

		32X		64X
Direct materials per unit	$	0.036	$	0.025
Direct labor per unit		0.050		0.022
Recyclable paper bags, salt, other		0.004		0.008
Total variable cost per unit	$	0.090	$	0.055

No other costs would change as a result of the decision between the two alternatives.

The Red Sox use an 18% discount rate and the price of a bag of Red Sox POP is $0.25.

PART 6 Requirements :(To receive credit must all of your computations - Ignore income taxes.)

A. Prepare an income statement for:

(1)

Alternative 1

(2)

Alternative 2