Read PSM Case 5-1 Garland Chocolates and prepare three 10-year cashflow spreadsheets for three scenarios---maintaining the current lines, upgrading the lines, and outsourcing---using the attached template and submit the completed spreadsheets.

Please only use explicit information provided in the case. For example, when the case states "annual maintenance cost...expected to increase by at least 25 percent in the next 12 months", you can assume that the cost will increase exactly 25% for the next year and remain at this level for future years.

Exhibit 1 lists the standard costs, rather than actual costs, of current operations. Exhibit 2 shows that the actual scrap rates deviate from the standard scrap rates. The standard material costs are based on the standard scrap rate rather than the deteriorated actual scrap rate. There fore you need to adjust the standard material costs based on the standard and actual scrap rates to calculate the actual costs. The labor costs do not need to be adjusted.

For the outsourcing option, the case states "it would need six months to ramp up production", therefore you should assume the outsourcing options takes effect in year 1 rather than 0. You may also make the assumption that the outsourcing option uses new packaging lines and thus enjoys the 20% increase in sales.

ANSWER IN EXCEL FORMAT ONLY, THE PICTURE HAS BEEN POSTED TO SHOW WHAT THE EXCEL ASKS.

manufacturing line was close to the target of 80 per that it would need six months to ramp up production of Edge- cent, it was also showing signs of deterioration. The ef-worth Toffee. ficiency rate had declined to 76 percent, compared to more than 90 percent five years prior, and it had become THE TEAM MEETING increasingly more difficult to find replacement parts. A new manufacturing line would cost approximately As Shanti looked at the information on her laptop that $600.000 installed. had been collected regarding manufacturing and packing of Edgeworth Toffee, she knew that something had to be OUTSOURCING done to address the declining margins of the brand as a re- sule of increased production costs. Investing in new equip- In addition to investigating options to replace the existing mest seemed like an obvious solution: however, the capital manufacturing and packing lines, Shanti had also looked investment would be significant and her proposal would into outsourcing. A preliminary review indicated that there need to exceed the company's 10 percent cost of capital would be substantial coordination costs if only packing rate to get approval by finance. was outsourced, therefore, outsourcing manufacturing and While reviewing the proposal by Martin, Shanti felt that packing was investigated. Ian and Shanti selected two con- some of the overhead coses at the Durham plant could be elim tract manufacturers to submit proposals, Martin Contractinated if production of Edgeworth Toffee was outsourced. Manufacturing (Martin) and Dasan Inc. Bids were requested The estimate provided by the accounting department was that from both for the existing packaging and the new pack overhead costs allocated to the brand could be reduced by ap- aging proposed by marketing. In order to make sure the proximately 30 percent if production was outsourced. suppliers were well informed about the manufacturing and Historically, the company's strategy had been to packing processes, both were invited to tour the Durham control production of its products to ensure quality and plant, and they were provided with detailed information delivery performance. Garland had an excellent reputa- and related data regarding the operation of the lines tion with it customers and the customer service level Following a review of the proposals submitted by the for Edgeworth Toffee was a line fill rate of 98 percent. suppliers, lan and Shanti decided that Martin had the best However, if the case to outsource could be made sue bid. Martin quoted a cost of $68.00 for manufacturing and cessfully to the team on Monday, Shanti felt that senior packing for both the current packaging and marketing's management would approve the proposal. This was an new packaging. The supplier would be responsible for raw important decision and she wanted to make a clear rec- material and packaging material costs. In addition, Garlandommendation at the meeting on Monday, supported by a would pay $35,000 in tooling costs up front. Martin indicated thorough analysis of both options. manufacturing line was close to the target of 80 per that it would need six months to ramp up production of Edge- cent, it was also showing signs of deterioration. The ef-worth Toffee. ficiency rate had declined to 76 percent, compared to more than 90 percent five years prior, and it had become THE TEAM MEETING increasingly more difficult to find replacement parts. A new manufacturing line would cost approximately As Shanti looked at the information on her laptop that $600.000 installed. had been collected regarding manufacturing and packing of Edgeworth Toffee, she knew that something had to be OUTSOURCING done to address the declining margins of the brand as a re- sule of increased production costs. Investing in new equip- In addition to investigating options to replace the existing mest seemed like an obvious solution: however, the capital manufacturing and packing lines, Shanti had also looked investment would be significant and her proposal would into outsourcing. A preliminary review indicated that there need to exceed the company's 10 percent cost of capital would be substantial coordination costs if only packing rate to get approval by finance. was outsourced, therefore, outsourcing manufacturing and While reviewing the proposal by Martin, Shanti felt that packing was investigated. Ian and Shanti selected two con- some of the overhead coses at the Durham plant could be elim tract manufacturers to submit proposals, Martin Contractinated if production of Edgeworth Toffee was outsourced. Manufacturing (Martin) and Dasan Inc. Bids were requested The estimate provided by the accounting department was that from both for the existing packaging and the new pack overhead costs allocated to the brand could be reduced by ap- aging proposed by marketing. In order to make sure the proximately 30 percent if production was outsourced. suppliers were well informed about the manufacturing and Historically, the company's strategy had been to packing processes, both were invited to tour the Durham control production of its products to ensure quality and plant, and they were provided with detailed information delivery performance. Garland had an excellent reputa- and related data regarding the operation of the lines tion with it customers and the customer service level Following a review of the proposals submitted by the for Edgeworth Toffee was a line fill rate of 98 percent. suppliers, lan and Shanti decided that Martin had the best However, if the case to outsource could be made sue bid. Martin quoted a cost of $68.00 for manufacturing and cessfully to the team on Monday, Shanti felt that senior packing for both the current packaging and marketing's management would approve the proposal. This was an new packaging. The supplier would be responsible for raw important decision and she wanted to make a clear rec- material and packaging material costs. In addition, Garlandommendation at the meeting on Monday, supported by a would pay $35,000 in tooling costs up front. Martin indicated thorough analysis of both options