Question

A. Garringer glove is an old family operated business. Current management is concerned that the company is beginning to lose its competitive advantage and fears that the company may encounter significant business challenges in the future.The company's controller has prepared the following data for use in the calculation of the economic value added (EVA) measure for presentation to the company's owners:

Before tax profit	$100,000
Total Assets	$2,500,000
Current Liabilities	$1,200,000
Average Interest rate on debt	7%
Average tax rate	28 %

Calculate Garringer Glove's EVA. Is the company creating wealth for its owner?

B. Hanna's Banana Shack is a distributor of tropical fruit candies. The following activities occur in Hanna's manufacturing facility for a batch of a particular type of candy:

Activity	Hours
Fruit processing (3 departments)	2.5
Inspection	1.0
Fruit grading (for quality of candy)	1.5
moving fruit (two moves)	1.0
waiting (for the second and third processes)	2.0
Storage (before delivery to the customer)	4.0

a. Calculate the manufacturing cycle time for the item.

b. Calculate the manufacturing cycle efficiency for the item.

c. What is the company's throughput in batches of the candy if the company has 255 work days available during the year?

Answer 1

A. Calculation of EVA

EVA = NOPAT - WACC * Capital Employed**

=[100000 - ( tax@28%)] - ( 1300000 * 7%)

= $-19000

WACC = Cost of equity + Cost of debt

Capital Employed = 2500000 - 1200000 = 1.3 million

Assumptions:

a. No interest has been paid

b.total capital employed is by way of debt. so WACC is 7%

B.

a.Calculation of manufacturing cycle time for the item

Manufacturing cycle time = Process time + Move time + Inspection time + Queue time

=2.5 + 1.0 +(1.0+1.5) +2.0

= 8 hours

Manufacturing cycle Efficiency =      Process time

       Process time + Move time + Inspection time + Queue time

= 2.5/7

= 35.714%

company throughput if worked 24 hours is (24/12)*255 days is 510 batches