Strategic Business Unit Analysis

Company XYZ has the opportunity to set up a new SBU to manufacture solar panels. The companys cash flow is very tight so the manager wants to be sure that this endeavor will at least pay for itself. The SBU can lease an existing plant for one year only. There is an existing building on the site but the manager will need to convert the facility to manufacture the panels. Here are the specifics of the case: Assumptions:

• Annual lease cost $75,000
• Plant Conversion cost $150,000
• Variable costs to produce each unit $50.00
• Local Value Added Tax: 7.5%
• Royalty $3.50
• Projected Sales price $75.00

The royalty is paid on a per unit basis (regardless of sales price) to the original patent holder on the technology the company needs to manufacture these solar panels. The VAT is based on the margin between the revenue and variable production costs.

Assuming there are no income taxes, answer the following questions about this endeavor (include formulas in answers):

1.If the company could sell 10,000 units in this year of operations, would the manager undertake the project?

2.If the company could sell 15,000 units in this year of operations, would the manager undertake the project?

3.What volume of units sold would the company need to sell to breakeven on the cash flow for the year?

4.If the company could sell only 6,000 units for the year but the market would allow them to raise the sales price; what is the average sales price they would need to breakeven on their cashflow?

5.If the comany could lease the building for 2 years instead of only 1 year; How would this impact their economics?

a. What volume would the company need to sell annually to breakeven if this was a 2-year project?