Carlyle Chemicals is evaluating a new chemical compound used in the manufacture
ID: 2713942 • 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 projects cash flows. Specifically, the firm expects the cost pet unit (which is currently $0.86) will rise at a rate of 12 percent annually over the next three years. The per-unit selling puce is currently $0.98 and this price is expected to rise at a meager 1 percent annual rate over the next three years. If Carlyle 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 firm's management with regard to this product?Explanation / Answer
Sales Rate will be as under
Acutal Sales and Gross Profit Margin
Based on the above estimates it is better to discontinue the product as from second year onwards it will run into gross loss which suggest that if we are not able to rise the Selling price then it is better to discontinue the product.
Year-1 Year-2 Year-3 Base Raw Material Cost 0.86 0.96 1.08 % Increase 12% 12% 12% Actual Raw Material Cost 0.96 1.08 1.21