Boardwalk Treat Shop is considering the desirability of producing a new chocolat
ID: 2455896 • Letter: B
Question
Boardwalk Treat Shop is considering the desirability of producing a new chocolate candy called Pleasure Bombs. Before purchasing the new equipment required to manufacture Pleasure Bombs, Marty Dey, the shop's propiertor performed the following analysis:
Because the expected annual sales volume is 160,000 units, Dey decided to undertake the production of Pleasure Bombs. This required an immediate investment of $60,000 in equipment that has a life of four years and no salvage value. After four years, the production of Pleasure Bombs will be discontinued.
Required:
a. Evaluate the analysis performed by Dey.
b. If Boardwalk Treat Shop has a time value of money of 12 percent, should it make the investment with projected annual sales of 160,000 units?
c. Considering the time value of money, what annual unit sales volume is required to break even?
Unit selling price $1.45 Variable manufacturing and selling costs (1.15) Unit contribution margin $0.30 Annual fixed costs Depreciation (straight-line for 4 years) $15,000 Other (all cash) 30,000 Total $45,000 Annual break-even sales volume = $45,000 / $0.30 = 150,000 unitsExplanation / Answer
a) As per the calculation for breakevensales in the given table is correct.
b) If the expected return is 12% , we have to calculate the Net present value of the project.
The initial investment =$60,000
Cash flow generated every year for 4 years is assuming sales of 160,000 units per year
contribution margin =0.3*160,000= 48,000
Net profit=48,000-15,000-30,000= $3,000
Ignoring taxes, the operating cash flow for each year= Net income+depreciaiton= 3000+15000= $18,000
Use NPV formulaein excel
=NPV(rate, cash flow,,)+initial investment
=NPV(12%, 18,000,18000,18000,18000)-60000=-$5328
Since NPV is negative the project should be rejected
c)For caluclating breakeven unit annual unit sales volume use Solver function in excel
let "x" be no of units sold in every year
the net cash flow every year=Net profit +depreciation=
=(0.3x)-30000
The NPV should be zero for the vlaue of "x" such that the breakeven will happen
60,000=[(0.3x-30000)/1.12^1] +[(0.3x-30000)/1.12^2] +[(0.3x-30000)/1.12^3] +[(0.3x-30000)/1.12^4]
Solving for X gives it as 165,847 units per year.