Carlyle Chemicals is evaluating a new chemical compound used in the manufacture
ID: 2450161 • Letter: C
Question
Carlyle Chemicals is evaluating a new chemical compound used in the manufacture of a wide range of consumer products The firm is concerned that inflation in the cost of raw materials will have an adverse effect on the project's cash flows Specifically, the film expects the cost per unit (which is currently $0.86) will use at a rate of 12 percent annually over the next three sears I he pet-unit selling puce is currently $0.98 and this price is expected to rise at a meager 1 percent annual tale over the next three years. If Cartyle expects to sell 6, 5, 7.2, and 10 million units for the next three years, respectively, what is your estimate of the gross profits to the firm? Based on these estimates, what recommendation would you offer to the film's management with regard to this product? The gross profit or (loss) for year 1 is $ (Round to the nearest dollar)Explanation / Answer
Given that,
Current Cost per unit = $0.86 , rising @ 12% annually for the next 3 years.
Current Selling Price per unit = $ 0.98, rising @ 1%
Expected Sales in million USD in year 1, 2 and 3 respectively = 6.5,7.2 and 10
For Year 1
Selling Price = $ 0.9898 ( 0.98*1.01)
Cost = $ 0.9632 (0.86*1.12 )
Gross Profit per unit = $ ( 0.9898- 0.9632) = 0.266
Total Gross Profit = $0.266 * 6.5 million = 0.1729 million
For Year 2,
Selling Price = $ (0.9898*1.01 ) = $0.9996
Cost = $ (0.9632 *1.12) = $ 1.078
Gross Loss per unit = $ ( 1.078 - 0.9996) = $0.079
Total Gross Loss = $0.079 * 7.2 million = $ 0.57 million
For Year 3,
Selling Price = $ (0.9996*1.01 ) = $1.009
Cost = $ (1.078 *1.12) = $ 1.207
Gross Loss per unit = $ ( 1.207 - 1.009) = $0.198
Total Gross Loss = $0.198 * 10 million = $ 1.98 million
Hence, the company should not manufacture this product after year 1, since it will incur a gross loss in the coming years.