Pixie Industries produces and sells a special type of organic machine oil sold b
ID: 2644823 • Letter: P
Question
Pixie Industries produces and sells a special type of organic machine oil sold by the barrel. For many years, they have sold through a Seoul-based importer by the name of Perk Mechanisms. Their contract with Perk Mechanisms is up for renewal and Pixie Industries has decided to look at options. You are in charge of making a recommendation. Option 1: Sell through Perk Mechanisms. Let them handle everything. Pixie Industries receives a net payment of $5 USD per barrel. Option 2: License production to MahnCo Importers of Seoul, Korea, who will also manage marketing and distribution of the oil. MahnCo Importers will charge Pixie Industries a fixed fee of $5 million USD to cover marketing costs. MahnCo will pay Pixie Industries $15 USD per barrel of Pixie products it sells in Asia. Option 3: Create a new enterprise, Pixie Asia, by building a small plant for $15 million USD. Annual fixed costs are estimated to be $30 million USD and variable costs are $60 per barrel. Sales price will be $100 USD per barrel. USD?United States Dollar Develop a five-year forecast for each of the three options. Assume there is no inflation and do a pre-tax analysis. Develop a cash flow forecast assuming sales remain variable at somewhere between 700,000 barrels and 950,000 barrels. Make and support a recommendation as to which of the options to employ.Explanation / Answer
Answer:
Based on the given table, Option 2 should be adopted.
Particulars
Option 1 ($)
Option 2($)
Option 3($)
Sales Level 700,000 Barrels
Net Income (a)
3,500,000
(700,000*5)
5,500,000
([15*700,000]-5,000,000)
(-2,000,000)
[(100*700,000)-(700,000*60)-30,000,000]
Cash Flow for 5 years
17,500,000
(a*5)
27,500,000
(a*5)
-25,000,000
[(-2,000,000*5)-15,000,000](cost of plant)
Sales Level 950,000 Barrels
Net Income (b)
4,750,000
(950,000*5)
9,250,000
([15*950,000]-5000000)
8,000,000
[(100*950,000)-(950000*60)-30,000,000]
Cash Flow for 5 years
23,750,000
(a*5)
46,250,000
(a*5)
25,000,000 [(8,000,000*5)-15,000,000](cost of plant)
Particulars
Option 1 ($)
Option 2($)
Option 3($)
Sales Level 700,000 Barrels
Net Income (a)
3,500,000
(700,000*5)
5,500,000
([15*700,000]-5,000,000)
(-2,000,000)
[(100*700,000)-(700,000*60)-30,000,000]
Cash Flow for 5 years
17,500,000
(a*5)
27,500,000
(a*5)
-25,000,000
[(-2,000,000*5)-15,000,000](cost of plant)
Sales Level 950,000 Barrels
Net Income (b)
4,750,000
(950,000*5)
9,250,000
([15*950,000]-5000000)
8,000,000
[(100*950,000)-(950000*60)-30,000,000]
Cash Flow for 5 years
23,750,000
(a*5)
46,250,000
(a*5)
25,000,000 [(8,000,000*5)-15,000,000](cost of plant)