Question: the enterkey manufacturing facility is launching a new product and...
The Enterkey Manufacturing facility is launching a new product and I’m an integral member of the design team. The manufacturing process involves both machinery and labor as the machinery used here is semi-automated. So, the usage of the machine hours and also the labor hours have to be taken into consideration to determine the product cost. There are also other facts and factors provided in the case study.
Raw material cost /unit =>$8
Semi-automated machine cost (asset)=>$1,500,000
MACRS recovery period => 7 yrs
The salvage value in this case study can be ignored as the price for the same is $0
Machine Output/hr =>175 Machine Output/week (Initially with 8hrs & 5 days per shift) => 175 * 40 hrs
Also the labor cost for the regular shift is determined to be $50
Further in the case study, there are some assumptions made as the facility is manufacturing other products and one of the assumptions being that, the employees/labor working for other products can be shifted on this new product.
The Production Manager is happy to accommodate an extra 8hrs/week during the regular 5 working days and employees will be eligible for some over time where in the overtime rate is $65/hr. Now, we will have to analyze whether overtime option is more favorable than adding an extra shift to meet the demand. Production volume and other information is given below.
Table 29-1 Production Volume (1000’s) Year 1 2 3 4 5 6 7 8 9
Volume 195 275 385 550 625 695 630 550 295
Corporate MARR 12% (after tax )
Cost of borrowing 9%
Effective tax rate 35%
Maintenance cost 12% of raw material cost
Overhead cost 2% of raw material cost (utilities, supervision, marketing, etc.)
Considering all the above, we have to conclude the following
i) the average selling price for the finished product to be determined
ii) Is the NPV more sensitive to changes in raw material cost or changes in selling price?
iii) Is the IRR more sensitive to changes in raw material cost or changes in selling price?
iv) Do variations in the machine’s cost have a significant impact on the IRR or NPV?