ability to double the amount of products

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UManitoba
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operates at capacity, manufacturing
400,000 products annually that are
ultimately sold in CHI stores within
the fiscal year. The facility was
purchased for $7,000,000 ten years
ago. With the expansion, CHI will
have the ability to double the amount
of products it can produce. The
company expects to increase
production by 75% in the first year of
expansion, followed by a steady
annual 10% growth based only on
incremental production (.e., 10%
growth excluding the original facility
capacity). The average apparel
product manufactured will be sold for
$30, and the price is expected to
increase by inflation annually, which
is forecasted to be a steady 2% over
the next ten years.
The direct materials and direct labour
used to manufacture these products
are 23% and 25% of sales,
respectively. These costs as a
percentage of sales are expected to
remain consistent over the time
horizon. Six additional supervisors
with fixed salaries of $100,000 per
year are also required. Insurance for
the additional facility space and
equipment is $80,000 per year.
Other incremental manufacturing
overhead costs (property taxes,
maintenance, security, etc.) excluding
depreciation are estimated to be
$500,000 annually. Wages are
expected to increase with inflation
over the time period, while other fixed
costs are expected to remain steady.
3
CHI would also need to purchase an
additional seven delivery trucks for
the incremental deliveries. The trucks
would cost $100,000 each and would
require $10,000 each in insurance
annually. Transportation variable
costs (gas, truck driver salaries, etc.)
are estimated to be 15% of
incremental revenue.

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