COMM 354 Feb 2013 Midterm Solution

# Cociente has also been unable to sell the waste so it

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Cociente has also been unable to sell the waste so it disposes of it at no charge. Grading and milling cost patterns are similar to 2006. Logs Bought Sales in Year & Processed E.F. Cost per log \$ Board Meters 2007 15,000 33. 9 85 508,500 2008 18,000 34. 6 88 622,800 2009 21,600 33. 8 90 730,080 2010 25,000 35. 0 98 875,000 2011 30,000 33. 8 98 1,014,000 2012 35,000 34. 5 98 1,207,500 Average 24,100 34. 3 92.8 826,313 Management has the opportunity to renovate the factory at a cost of \$99,000. The accountant has decided that this would be amortized over 11 years. The production manager knows that with the renovation he could lease “large” machines with annual capacity of #20,000 units each. These would be annual leases at a rate of \$190,000 per large machine. There is ample room in the factory for more machines. There would be a \$13,000 safety training session required before Cociente employees could use the “large machines. In 2010 Cociente began selling to Japan and now has a demand constraint estimated at #2,000,000 board meters per year. Status Quo EF 34.3 Log 98 Maximum logs Test profit Need 9 machines at 8 machines Logs 35,000 42,000 40,000 Board Meters 1,440,600 1,372,000 Revenue 13.5 19,448,100 18,522,000 Waste 0 0 Prepared by J. Kroeker, 2013 © Sauder School of Business, UBC Page 10

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Log 98 4,116,000 3,920,000 Replanting 2 84,000 80,000 Milling 160 6,720,000 6,400,000 Grading 3 4,321,800 4,116,000 Margin before Equipment 4,206,300 4,006,000 Equipment Costs 540,000 480,000 Net Profit 3,666,300 3,526,000 @ # 42,000 @ #40,000 Margin before machine 4,206,300 4,006,000 Prepared by J. Kroeker, 2013 © Sauder School of Business, UBC Page 11
With renovation and the ability to now use larger machines. The key is to test the financial benefit of using the larger machines in combination with smaller machines or just the large machines. The logs available will be #42,000 but they may want to only process #40,000. This decision is a function of the size of the batch costs of either \$190,000 or \$60,000. The best alternative is to select two large machines and one small machine. This enablesCociente to process #42,000 logs. The margin on the processing of #40,000 or #42,000 is the same as under the status quo and thus that number can be carried forward from the previous page. Renovation New Machine 190,000 Regular machine 60,000 Renovation 99,000 13,000 One time 112,000 @ # 42,000 @ # 42,000 @ #40,000 @ #40,000 Status Quo Capacity 45,000 45,000 40,000 40,000 45,000 Margin 4,206,300 4,206,300 4,006,000 4,006,000 4,206,300 Large 380,000 190,000 380,000 190,000 Small 60,000 300,000 - 240,000 540,000 Net 3,766,300 3,716,300 3,626,000 3,576,000 3,666,300 Change 100,000 50,000 (40,300) (90,300) One-time 112,000 112,000 The best alternative is \$100,000 better that the status quo and will take slightly more than one year to “payback the \$112,000 in one time costs. This renovation will provide future benefit as well, since Cociente will now have multiple configuration options for production. As log supply grows they can incrementally use small machine sand then switch to large machines once supply justifies this larger expense. Prepared by J. Kroeker, 2013 © Sauder School of Business, UBC Page 12
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• Sauder School of Business, J. Kroeker, Sauder School

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