The following data (in $/m3) was obtained from a company that makes insulation for commercial buildings: direct labor, 20; direct materials, 30; indirect labor and materials, 30% of direct labor; fixed expenses, 25; administrative costs, 25; selling costs, 10.
(a) Assuming a 100% first-pass yield, what should the selling price (per m3) be such that a 10% profit margin, over the cost of goods sold, will be obtained?
(b) Suppose that the first-pass yield is 94%. If the selling price is kept the same as calculated in part (a), what is the profit margin?
(c) Through process improvements, first-pass yield has been improved to 98%. However, the capital expenditures necessary for such improvements is $ 150,000. If the selling price is kept the same as in part (a), what is the profit margin, ignoring additional capital expenditures?
(d) For the improved process in part (c), assuming that monthly demand is 5000 m3, how long would it take for the company to break even on its added capital expenditures?
(e) Suppose that the company is able to sell product that does not meet first-pass quality criteria at a reduced price of $120/m3. For the improved process in part
(d), what is the break-even time now to recover added capital expenditures?