Question 9
9) New Plant? Because TrueBeat's capacity is limited to 8,000 units in their current production facility, management would like to explore the impact of building a new production facility. The company is considering a new production facility and equipment that will decrease their variable expenses by 30% but increase fixed expenses by 50%. TrueBeat still plans to produce and sell the same number of units in Year 4 (base). The new plant will give them a relevant range of 5,000 to 12,000 units. a) If the new production facility is built, what would be the company's new (1) contribution margin per unit, (ii) fixed expenses and (iii) the new profit formula? Complete the table below. i) New CM per unit ii) New Fixed expenses iii) New profit formula Under New production facility New Break-even New Year 4 6,000 Units Sales Revenue NOI b) Assume TrueBeat sells the same units as planned for Year 4 in the new plant, calculate the new margin of safety in (i) units) (ii) dollars and (iii) percent. i) MoS units ii) MoS dollars iii) MoS percent Has margin of safety improved or declined? Explain/comment in 10 to 30 words. c) Calculate the degree of operating leverage. Has operating leverage improved or declined from the "base" calculation in 9)? Discuss in 10 to 30 words. d) Conclusion: If you were a member of top management, would you have been in favor of constructing the new plant? Explain in 30 to 50 words [The following information applies to the questions displayed below.) Listed here are the total costs associated with the production of 1,000 drum sets manufactured by TrueBeat. The drum sets sell for $516 each. Costs 1. Plastic for casing-$19,000 2. Wages of assembly workers--$90,000 3. Property taxes on factory-$7,000 4. Accounting staff salaries-$33,000 5. Drum stands (1.000 stands purchased)-$35,000 6. Rent cost of equipment for sales staff-$36.000 7. Upper management salaries-$170,000 8. Annual flat fee for factory maintenance service--$16,000 9. Sales commissions-$25 per unit 10. Machinery depreciation, straight-line-$42,000 7) Changing sales price: Marketing research indicates that TrueBeat Company can sell more units of its product if they lower their sales price by 10% per unit. Remember to treat this scenario as independent from the items considered in 6. a) Calculate the new (i) sales price and (ii) contribution margin per unit. i) new sales price ii) CM per unit iii) What will the new Profit formula be? b) How many units will they need to sell to make the same operating income (NOI) as originally projected for year 4 (base assumption)? c) How many units will they need to sell to break-even at the new sales price? d) If TrueBeat Company can sell 20% more units (2 times original units) with the decreased sales price, how much operating income will they make? e) Conclusion: Using the information calculated above, should TrueBeat lower their sales price? Why or why not? Will their relevant range be an issue for this decision? Your answer should include full sentences and 30 to 50 words. 8) Increase Fixed Costs: TrueBeat's management is also considering purchasing additional advertising for $40,000. Marketing studies suggest that sales will increase by 200 units a year. Should the company purchase the additional advertising? Your answer should use complete sentences and contain 30 to 50 words. Support your answer with calculations of at least 2 of the following items. (a) Net Operating Income, (b) Break-even in units or dollars,(e) target sales in units or dollars to maintain the same Net Income as originally assumed for year 4. You may also use other calculations that you feel are relevant. Remember to treat this scenario as independent from the items considered in 6) and 7)
