Wisconsin Beef Barn is a midsize business that specializes in providing high quality beef products to retailers and club stores. They currently sell an all-beef patty through those channels. After market research and successful test trials with consumers, they are now considering adding a bacon cheeseburger patty to their product lineup.

As their accounting consultant, management has asked you to determine the financial impact of the potential new product. In order to make the new product and meet anticipated demand, a new production line would need to be installed. There is sufficient building space available to accommodate the new production line. The new line would take the raw materials that are received and prepare them to be mixed together. This entails dicing the blocks of cheese into usable pieces and chopping the bacon into smaller pieces. The materials would then be mixed together to form a beef blend. From there, the blend would be extruded into a tube shape for slicing. The tube will then be frozen, after which it is sliced into individual patties. During the slicing process, an interleaving machine will insert sheets of paper between the slices of beef patty to keep them separated. After that, the sliced beef will be bagged, passed through a metal detector, and finally packed into a box for shipping. The line is capable of producing 300 pounds per hour at full speed without any downtime.

Following is the relevant data needed to complete your analysis for management.

PRODUCT SPECS

Individual Patty Weight = 8 oz

Patties per Bag = 10

Bags per Box / Case = 10

MATERIAL LIST WITH PURCHASE PRICES

Material

Purchasing Unit of Measure

Cost/UOM

Beef

Lb

4.00

Salt

Lb

0.50

Spice

Lb

0.75

Cheese

Lb

2.00

Bacon

Lb

3.50

Plastic for Bagging

Roll

400.00

Box

Each

5.00

Paper for Interleaving

Roll

75.00

Tape for Case Sealing

Roll

400.00

The rolls of plastic, paper, and tape each contain 400 feet of material per roll. Each bag requires 10 inches of plastic.

BILL OF MATERIAL (BOM) - Per 100 lbs of Beef Patty Blend

Material

UOM

Qty Req'd

Beef

Lb

Salt

Oz

48

Spice

Oz

112

Cheese

Lb

10

Bacon

Lb

10

Bag

Each

Box

Each

Paper

Inch

45

Tape

Inch

48

Assume the yield to be 100% - no scrap.

WORKFORCE DATA

Hours / Shift = 8

Crew Size = 8

Fully Loaded Hourly Wage Rate per Person = $28 (includes benefits cost)

EQUIPMENT NEEDED

Equipment

Purchase Price

Freight

Installation

Cheese Dicer

$90,000

$500

$4,500

Bacon Chopper

$94,000

$2,000

$4,000

Mixer/Blender

$38,500

$500

$1,000

Extruder

$62,000

$1,000

$2,000

Freezer

$115,000

$1,500

$8,500

Slicer

$370,000

$10,000

$20,000

Interleaver

$320,000

$5,000

$25,000

Bagger

$45,000

$1,000

$4,000

Metal Detector

$28,500

$500

$1,000

Box Former

$43,000

$750

$1,250

Casepacker

$72,000

$1,000

$2,000

Taper

$23,000

$250

$1,750

Additional Information:

The company assumes 80% uptime on production lines for the sake of capacity planning while doing financial analyses. However, when calculating labor dollars for product costing, it does not consider the 20% downtime. Any wages paid during downtime are considered variances. Labor dollars are to be calculated assuming 100% uptime.

The company's effective income tax rate is 40% and it uses a discount rate of 4%.

The company uses straight line half year method for calculating depreciation for internal reporting purposes and uses double declining balance method for tax purposes. (MACRS table) All manufacturing equipment uses a 7 year life.

To estimate equipment maintenance expense, the company assumes year 1 maintenance expense will be equal to 5% of the capitalized cost of the equipment. The company also assumes a 5% annual increase, compounding over the next two years. Subsequent years remain flat.

The company has 2 other production lines in its facility and currently runs 2 shifts, 5 days per week, for 50 weeks of the year. It is the company's policy to have a supervisor dedicated to one line per shift, at a cost of $200,000 per supervisor.

Sanitation is done on 3^rd shift, utilizing a crew of 10 working 8 hours at a fully loaded wage rate of $28. The crew has capacity to sanitize the additional line without working extra hours or adding headcount.

The company currently has a Brand Manager in the marketing department at a cost of $200,000 per year. There is also currently an Associate Marketing Manager, at a cost of $150,000 per year. Both would offer support of the new product. However, if volume reaches 500,000 pounds annually on the new product, the company would need to add a second Associate Marketing Manager at the same annual cost.

The sales and marketing plans are as follows:

Item

Year 1

Year 2

Year 3

Year 4

Year 5

Potential Sales Lbs

250,000

400,000

650,000

900,000

1,000,000

Discounts/Lb

1.00

.75

.50

.50

.50

Marketing Expense

1,000,000

1,250,000

1,500,000

1,500,000

1,500,000

The company has already prepaid a $50,000, non-refundable deposit on slotting fees for products that would be replaced in store by the new product. (Slotting fees are, simply put, fees paid to retailers to purchase shelf space) The slotting fees on the new product are $25,000 in year one, and the aforementioned deposit is non-transferrable between products.

The company has also already spent $50,000 on market research. The research indicated that $10.00 per pound is the optimal selling price.

To fund the purchase of raw materials for the new product line, the company would enter into a note payable. The amount of the note would be $400,000 with equal payments of principle and interest due June 30 and December 31 each year. It is a 4% note due in 60 months.

In place of purchasing and installing a new line, the company has the option of co-manufacturing the product with a 3^rd party. The 3^rd party has unlimited capacity and they directly purchase all raw materials. They charge a $50,000 fixed fee annually to do business regardless of volume. Additionally, the following per pound costs would apply at various annual levels of production:

o0 - 499,999 lbs = $6.25 per pound

o500,000 - 999,999 lbs = $6.00 per pound

o1,000,000 - 1,499,999 lbs = $5.75 per pound

o1,500,000 and above = $5.50 per pound

The deliverables from management are as follows:

1.Finish the Bill of Material to determine overall product cost. Missing quantities can be derived from other information provided.

2.Develop the supporting amortization schedule for the note payable needed for initial raw materials purchases.

3.Develop a product specific Income Statement assuming production is done in house with the new equipment. (also referred to as Profit and Loss Statement, or P&L) The company would like to see the statement carried out over 5 years. Also, per pound data should be shown on each line of the P&L. Show the annual cash flow at the bottom of the income statement.

a.The company likes to see individual components of Cost of Goods Sold on separate lines of the P&L. The components are grouped into variable and fixed, with subtotals at each level, and they classify COGS according to:

i.Raw Materials

ii.Packaging Materials

iii.Labor

iv.Overhead - Separate line item for each category of Overhead

b.It also likes to see Selling, General, and Administrative items broken out into their own line on the P&L, all rolled into a subtotal of SGA expenses.

4.Develop a product specific Income Statement assuming the product is co-manufactured by a 3^rd party. The statement should also be carried out over 5 years and again should show per pound data on each line.

5.Calculate the return on the capital investment using the following methods:

a.Internal Rate of Return

b.Net Present Value

c.Payback Period

d.Discounted Payback Period

6.Calculate Break Even Point in Sales Volume for each year of the project for producing in house and also for co-manufacturing.

7.Prepare a memo that addresses the following:

a.Make a recommendation on whether to produce in house or co-manufacture

i.The company typically looks at total cash flow over the 5 year analysis of each option as the financial comparison point

ii.Discuss how the decision may be impacted by using Net Present Value analysis.

iii.Discuss the advantages and limitations of each method.

b.Discuss the advantages and disadvantages of producing in house vs. co-manufacturing with a 3^rd party

c.Discuss why costs (if any) were identified in the case study as irrelevant and therefore excluded in the analysis

d.Discuss the advantages and limitations of each method of calculating the return on a capital investment

NOTES:

Round all calculations to 2 decimal places.

Assume the company has enough operating income from other products to offset any operating loss (if applicable)