The Covid Corporation is a local distillery that produces whiskey, which it sells in the intermediate market. The following information is available about their whiskey (pricing is per batch) (revenue and costs are provided on a per batch basis): Revenue $ 120.00 Manufacturing costs: Material $ 37.50 Labour 15.00 Manufacturing overhead 30.00 Total Manufacturing costs $ 82.50 Annual volume, in batch 22,000 Machine hours available (M1) (annual) 10,000 hours Each whiskey batch is produced using production equipment referred to as M1. The $ 15.00 per unit labour cost represents the cost of the employee to run the machine (M1). Manufacturing overhead costs are approximately 30% fixed, based on current volume of 22,000 batches. Each whiskey batch requires 0.4 hours of machine time on M1. In light of the ongoing pandemic, Covid is considering the purchase of new equipment, M2, that would allow them to shift production to hand sanitizer. This new equipment has a capital cost of $3,200,000. Producing a batch of hand sanitizer will require 0.8 hours of time on M1 and 1.2 hours on M2. The demand for hand sanitizer is increasing, and Covid would be one of many producers in the field. Production of hand sanitizer would not impact the current demand for their whiskey. Company management estimates that revenue for hand sanitizer will be $ 425.00 per batch. Variable overhead costs on the M2 are expected be the same per machine hour as on M1. The direct material cost for hand sanitizer is $ 75.00 per batch. The hourly labour rate for the machine operator will be the same as the hourly labour rate for the operator of M1. The maximum machine hours available on M2 is 10,000 hours per year. There will be no increase in fixed costs. All administrative costs are considered fixed. Sales commissions equal 5% of sales on each batch of whiskey and it is anticipated that this commission rate would apply to each batch of hand sanitizer as well. For tax purposes, the CRA requires that assets in this class be written off using the declining balance method at a CCA rate of 20%. Management is uncertain as to the demand for hand sanitizer but expects it to be high for the next two years. Conservatively, they have estimated that demand in the first two years will be 6,000 units. They expect demand to increase to 9,000 units for years 3 to 5. It is anticipated that M2 will have a useful life of 5 years. For purposes of a conservative evaluation, the company has assumed the residual value will be $ 0. The CCA class will remain open. The company's combined corporate tax rate is 20% and it requires a 10% return, after tax, on projects of similar risk. The vice president of marketing has indicated that this shift in production would bring significant media attention to Covid Corporation. She feels the company has an opportunity to help the Canadian market in their time of need. The president is concerned that if the equipment is purchased, it will take the company into new markets where it has not competed before. He is also worried that if the company produces hand sanitizer, they may not have capacity to continue making as much whiskey and their existing customers may look to competitors for this product. Required: Prepare a report to the president. The report should include a supported recommendation for the proposed acquisition of M2, as well as any relevant qualitative issues. You can assume that the company will prioritize production of hand sanitizer over whiskey if faced with capacity issues. Please ensure you discuss any relevant qualitative factors you think may be relevant. 1. Assuming the new equipment is NOT purchased (status quo): a. what is the batch contribution margin for Whiskey? (4 mark) b. calculate annual total contribution margin for Whiskey (1 mark) 2. Assuming the new equipment is purchased, and the company produces Hand Sanitizer first a. calculate M2's maximum capacity in units for Hand Sanitizer (2 marks) b. calculate the batch contribution margin for Hand Sanitizer (7 marks) a. 3. For years 1 through 5 calculate M1 machine hours used after first producing hand sanitizer? (1 mark) b. calculate M1 machine hours remaining after producing hand sanitizer? (1 mark) How many batches of whiskey can be produced with the excess machine hours (if any) of M1 (1 mark)? c. 4. Complete your quantitative analysis as to whether or not M2 should be acquired; be sure to take available capacity and demand for Whiskey and Hand Sanitizer into consideration. Please note, there are a lot of part marks here, so even if you're stuck, it's worth it to write something down! For the tax shield calculations, use the half year rule formula (for simplicity). (9 marks) 5. Provide qualitative factors you think the company should consider (4 mark)