IThe following Information appies to the questions displayed below Beacon Compan

Question

IThe following Information appies to the questions displayed below Beacon Company is considering automating its production facility. The Initial Investment in automation would be $6.54 millon, and the equipment has a useful life of 5 years with a residual value of $1,090.000. The company will use straight-line depreciation. Beacon could expect a production Increase of 38,000 units per year and a reduction of 20 percent in the labor cost per unit Current (no automation) 72.000 units Proposed (automation) Production and sales volume 110.000 units Per Unit s 95 Per Unit Total Total S 95 Sales revenue Variable costs Direct materials Direct labor Variable manufacturing overhead 20 Total variable manufacturing costs Contribution margin Fixed manufacturing costs 46 S 49 $ 53 Net operating income

Explanation / Answer

1. a)

current ( no automation)

72000 units

proposed (automation)

110000 units

1 b) yes , comapny should go for automation, as this will result in more net operating income.

4. net Cash inflows

contribution from incresed sales = 38000 units* $53 per unit contribution

= $ 2014000

increase in fixed cost is ignored assuming its increse due to depreciation which is a non cash item.

NPV = present value of cash inflows - present value of cash outflow + present value of salvage

= 2014000 (PVAF 13% , 5 yrs) - 6540000 + 1090000*(PVF 13%, 5th yr)

= 2014000*3.517 - 6540000 + 1090000 * .543

= 7083238 - 6540000 + 591870

= $ 1135108

5. NPV = 2014000 * PVAF(8%, 5 yrs) - 6540000 + 1090000* (PVF, 8%, 5th yr)

= 2014000 *3.993 - 6540000 + 1090000*.681

= 8041902 - 6540000 + 742290

=$ 2244192

current ( no automation)

72000 units

proposed (automation)

110000 units

per unit total per unit total sales revenue $ 95 6840000 95 10450000 variable costs: direct matrial 18 1296000 18 1980000 direct labour 20 1440000 20(1-.20) = 16 1760000 variable manufacturing overhead 8 576000 8 880000 total variable manufacturing cost 46 3312000 42 4620000 contribution (sales - total variable manufacturing cost) 49 3528000 53 5830000 fixed manufacturing cost 1110000 2190000 net operating income (contribution - fixed manufacturing cost) $2418000 $3640000

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