BUS 5110 Group Project: For this activity, you have been hired as a consultant on a multi-year basis for a global washer and dryer manufacturer. They currently offer two core washer and dryer sets: a high-end model set and an economical model set. 1. For your first assignment, management has provided the following revenue and cost information: High End Set Economical Set Sales price $3,500 per unit $1,000 per unit Labor $875 per unit $250 per unit Materials $1,400 per unit $300 per unit Direct fixed costs $25,000 per month $16,500 per month Allocated fixed costs $85,000 per month $85,000 per month They want a better understanding of their business to make budgeting and sales goals decisions and have asked you to determine their: a. Contribution Margins for each product line b. Break-even quantities for each product line c. Break-even quantities to earn $500,000 per year margin on the high-end line d. Break-even quantities to earn $300,000 per year margin on the economical line They expect the product lines to fully absorb the costs allocated to them. Once you have determined these amounts, they have asked that you present the information, describe how you performed your calculations, and explain what the results mean. 2. Later, the company is considering the purchase of machinery and equipment to set up line to produce a combination washer-dryer. They have given you the following information to analyze the project on a 5-year timeline: • Initial cash outlay is $150,000, no residual value. • Sales price is expected to be $2,250 per unit, with $595 per unit in labor expense and $795 per unit in materials. • Direct fixed costs are estimated to run $20,750 per month. • Cost of capital is 8%, and the required rate of return is 10%. • They will incur all operational costs in Year 1, though sales are expected to be 55% of break-even. • Break-even is expected to occur in Year 2. • Variable costs will increase 2% each year, starting in Year 3. • Sales are estimated to grow by 10%, 15%, and 20% for years 3 – 5. They have asked you to calculate the product’s contribution margin, break-even quantity, NPV and IRR. After you present your work, management makes the investment. Explain how the project analyses do or do not support this decision. In either case, what are the factors that should have been considered in management’s decision? 3. After a few years, your contract is renewed, and you are asked to evaluate the performance of the product lines as management is concerned with the viability of the washer-dryer combination product. They provide you with the latest annual information by product: High End Set Economical Set W/D Combo Total Sales $4,700,000 $4,060,000 $880,000 $9,640,000 Labor $(1,250,000) $(1,015,000) $(235,000) $(2,500,000) Materials $(1,885,000) $(1,220,000) $(315,000) $(3,420,000) Direct fixed costs $(325,000) $(220,000) $(250,000) $(795,000) Allocated fixed costs $(650,000) $(650,000) $(650,000) $(1,950,000) Net Income $590,000 $955,000 $(570,000) $975,000 You are asked to perform an analysis to determine whether to drop or keep the washer-dryer combination product and present your findings, including the steps taken to make your determination. You are also asked to evaluate if the costing methodology is appropriate and, if not, recommend alternative methods.
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