Clark Paints: The production department has been investigating possible ways to
ID: 2507979 • Letter: C
Question
Clark Paints: The production department has been investigating possible ways to trim total production costs. One possibility currently being examined is to make the paint cans instead of purchasing them. The equipment needed would cost $200,000 with a disposal value of $40,000 and would be able to produce 5,500,000 cans over the life of the machinery. The production department estimates that approximately 1,100,000 cans would be needed for each of the next five years.
The company would hire three new employees. These three individuals would be full-time employees working 2,000 hours per year and earning $12.00 per hour. They would also receive the same benefits as other production employees, 18% of wages in addition to $2,500 of health benefits.
It is estimated that the raw materials will cost 25
Explanation / Answer
Depreciation =200000-40000/5 500 000 x1 100 000=32000
Salary and other benefit =2000x12+(2000x12)x18%=30820
year
Cost purchased @45
investment
depreciation
Sal+other benefist
raw
cost
0
495000
200000
32000
30820
275000
55000
1
495000
32000
30820
275000
55000
2
495000
32000
30820
275000
55000
3
495000
32000
30820
275000
55000
4
495000
32000
30820
275000
55000
5
495000
32000
30820
275000
55000
year
Annual cash flows
Cumulative cash flows
0
-200000
1
66417
66417
2
66417
132834
3
66417
199251
4
66417
265668
5
66412
358085
Cash flow=71617
Payback period=3+(200000-199251)/66417=3.011 years
Annual rate of return = Cash flow/investment=71617/200 000=35.81%
year
Cost purchased @45
investment
depreciation
Sal+other benefist
raw
cost
0
495000
200000
32000
30820
275000
55000
1
495000
32000
30820
275000
55000
2
495000
32000
30820
275000
55000
3
495000
32000
30820
275000
55000
4
495000
32000
30820
275000
55000
5
495000
32000
30820
275000
55000