Guthrie Enterprises needs someone to supply it with 140,000 cartons of machine s

Question

Guthrie Enterprises needs someone to supply it with 140,000 cartons of machine screws per year to support its manufacturing needs over the next five years, and you've decided to bid on the contract. It will cost you $1,800,000 to install the equipment necessary to start production; you'll depreciate this cost straight-line to zero over the project's life. You estimate that in five years this equipment can be salvaged for $150,000. Your fixed production costs will be $265,000 per year, and your variable production costs should be $8.50 per carton. You also need an initial investment in net working capital of $130,000. If your tax rate is 35 percent and you require a 14 percent return on your investment, what bid price per carton should you submit?

Explanation / Answer

Equipment Cost 1800000 Depriciation over 5 years 360000 Salvage Value 150000 FC 265000 VC=8.5*140000 1190000 Working Capital 130000 FC+VC+Depreciation 1815000 Average Investment=1/2(Original Cost+Salvage Value)+Working Capital 1105000 Sales-181500=(1105000*14)/0.65( as tax is @35%) 23800000 Sales=23800000+1105000 24905000 Per Unit Price=24905000/140000 177.89

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