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The CEO of Orange, Inc. is evaluating a proposal for outsourcing all their internal part production and focusing internal operations only on assembly of the

The CEO of Orange, Inc. is evaluating a proposal for outsourcing all their internal part production and focusing internal operations only on assembly of the parts. The cost to convert to outsourcing ,forecast at $350,000, is not depreciable and will be expensed (paid for) in year 1 in S.G.& A.The proposal is forecasted to reduce the unit cost of the parts by 15% in year 1 and then the cost will be constant at the reduced level in the future. The additional purchasing effort is expected to increase S.G.& A. expense by 8% in year 1 and hold constant at the the new level in the future. This sales price of their single product will be reduced by 5% in year 1 and then held constant at this level in the future. The price decrease is forecasted to increase sales quantities as shown below. Without the proposal the sales price, costs to produce, S.G.& A., and sales are all expected to stay the same as present. Construct the Income statement part of a financial analysis that could be used to evalaute the proposal. The time horizon for this proposal is 5 years. Show all subtotals in the income statement.

Year 1 2 3 4 5
Sales Quantity- with proposal 126,000 132,300 138,915 145,861 153,154
Sales Quantity - without proposal 120,000 120,000 120,000 120,000 120,000
Present one-time change Proposed
Sales Price (per unit) $18.99 5% less
Machined parts cost per unit $4.40 15% less
Assembly cost per unit $5.60 0% no change
S.G. & A $150,000 8% increase
Cost of proposal $350,000
Proposal life span 5 years
Income tax 14% annually
MARR 10% annually

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