Currently, Bryer\' s Ice Cream uses Finamac continuous ice cream machines for th
ID: 1115141 • Letter: C
Question
Currently, Bryer' s Ice Cream uses Finamac continuous ice cream machines for their process. However, last week, Emery Thompson, a competitor of Finamac came into the facility to propose a new system that would improve the operation. The Finamac system has the following characteristics: 120 Gallons per minute Production Rate on Line: Production Labor on line Production Labor rate: Production Losses for Change Over 5 people 25 per hour, 8 hour/day, Sdays aweek for 50 weeks per year 400 gallons per change over 100 Changes $1.27 Production Change overs per year Cost of 1 Gallon Production Loss: With the Emery Thompson system, there are many improvements: Production Rate on Line: Production Labor on line: Production Labor Rate Production Losses for Change Over Production Change Overs per year Cost of 1 Gallon Production Loss 150 Gallons per Minute people $25 per hour, 8 hour/day, Sdays aweek for so weeks per year 100 Gallons 100 $1.27 The new Emery Thompson system would cost $12,620,000 up front and would have required maintenance of $1,000,000 per year going up at 6% per year, would you recommend this project at the company MARR of 12% Do you ecommend it?Explanation / Answer
Answer:
Particulars
Scenario-1
Scenario-2
Production rate on line (gallons per minute)
120
150
Production Hrs/day
8
8
No of days/week
5
5
No of weeks/year
50
50
No of minutes per year(60*8hrs*5days*50weeks)
120000
120000
Total Production of gallons
14400000
18000000
Production losses(400*100)&(100*100)
40000
10000
Net Production in Gallons
14360000
17990000
Revenue @$10 per gallon per annum
$ 143,600,000
$ 179,900,000
Less: Cost of production losses per annum
$ 50,800
$ 12,700
Net Revenue per annum
$ 143,549,200
$ 179,887,300
Incremental Revenue per annum
$ 36,338,100
Incremental revenue for 10 years
$363,381,000
Incremental Cost
Upfront cost
$ 12,620,000
Annual maintenance cost
$ 1,000,000
Inflation rate per annum for maintenance cost
6%
Rate of Interest per annum
12%
Year
Opening cost
Maintenance
Interest@12%
Closing cost
1
$ 12,620,000
$ 1,000,000
$ 1,634,400
$ 15,254,400
2
$ 15,254,400
$ 1,060,000
$ 1,957,728
$ 18,272,128
3
$ 18,272,128
$ 1,123,600
$ 2,327,487
$ 21,723,215
4
$ 21,723,215
$ 1,191,016
$ 2,749,708
$ 25,663,939
5
$ 25,663,939
$ 1,262,477
$ 3,231,170
$ 30,157,586
6
$ 30,157,586
$ 1,338,226
$ 3,779,497
$ 35,275,309
7
$ 35,275,309
$ 1,418,519
$ 4,403,259
$ 41,097,087
8
$ 41,097,087
$ 1,503,630
$ 5,112,086
$ 47,712,804
9
$ 47,712,804
$ 1,593,848
$ 5,916,798
$ 55,223,450
10
$ 55,223,450
$ 1,689,479
$ 6,829,551
$ 63,742,481
From the above it is clear that the incremental revenue is more than the incremental cost and hence the proposal can be accepted.
Particulars
Scenario-1
Scenario-2
Production rate on line (gallons per minute)
120
150
Production Hrs/day
8
8
No of days/week
5
5
No of weeks/year
50
50
No of minutes per year(60*8hrs*5days*50weeks)
120000
120000
Total Production of gallons
14400000
18000000
Production losses(400*100)&(100*100)
40000
10000
Net Production in Gallons
14360000
17990000
Revenue @$10 per gallon per annum
$ 143,600,000
$ 179,900,000
Less: Cost of production losses per annum
$ 50,800
$ 12,700
Net Revenue per annum
$ 143,549,200
$ 179,887,300
Incremental Revenue per annum
$ 36,338,100
Incremental revenue for 10 years
$363,381,000
Incremental Cost
Upfront cost
$ 12,620,000
Annual maintenance cost
$ 1,000,000
Inflation rate per annum for maintenance cost
6%
Rate of Interest per annum
12%
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