Question

Cupid Company sells boxes of chocolates. They currently offer two different types, heart shaped and cupid shaped. They sell 8,750 cupid shaped boxes for $18.75 and 10,000 heart shaped boxes for $15.00 each. Cupid Company has $18,000 of fixed costs (non-plant). Both boxes currently have an extremely manual manufacturing process. The cupid shaped box costs $7.50 each to make, comprised of $1.50 in variable overhead, $2.10 in direct materials, direct labor cost $8.15 per hour and it takes employees 28.72 minutes per box. The heart shaped box costs $6.00 each to make, comprised of $1.50 in variable overhead, $1.58 in direct materials, $8.15 per hour for direct labor; it takes employees 21.5 minutes per box.

One of the employees, Venus, proposed a cost savings plan. Her plan was to purchase a new chocolate picking machine, which would cut direct labor by 40%. The machine costs $785,000 and would last the company 6 years with a $20,000 salvage value. They would be able to sell the machine at the end of six years for $35,000.

Venus was discussing her plan with a co-worker, Aphrodite. Aphrodite believed that sales were currently constrained by available space and labor. She believed that in addition to reducing labor costs, Cupid Company would also be able to increase sales of each style by 5%. Additionally, she proposed a new product be offered; chocolate flower bouquets. The company would be able to see 3,200 units at $30 each. The cost would be $10.50 per bouquet, comprised of $1.50 in variable overhead, $7.00 in direct materials, $8.15 per hour for direct labor and it takes employees 14.73 minutes per bouquet. Additionally, fixed costs would increase by $5,000.

Cupid Company's desired rate of return is 15%, has a 30% tax rate and they use straight-line depreciation for all plant assets. All numbers provided are pre-tax.

Create a one page document for management that illustrates your recommendation whether to proceed / not to proceed with the proposals.

Answer 1

	Before new plan	Before old plan
sales units
cupid	8750	9187.5
heart	10000	10500
chocolate		3200
sales Value
cupid	164062.5	172265.625
heart	150000	157500
chocolate		96000
Vaiable cost
overhead	28125	34331.25
direct material	34175	58283.75
labour	63325	46294.75
Fixed costs	18000	23000
Depreciation		127500
Profit before tax	170437.5	136355.875
Tax	51131.25	40906.7625
Profit after tax	119306.25	95449.1125

The company shouldn't addapt the plan has it is resulting in negative return. The cost of the asset is high while the savings are very less so its not feasible to adapt the plan