Part 1
Benson, Inc. manufactures and sells camping tents. They are considering the production of an additional type of tent, the Yukon, which will be sold for $250. To produce the Yukon and its carrying case, the following materials are needed:
1. 475 square feet of nylon material
2. 40 feet of zippers
3. 85 feet of titanium-based rods
Currently, Benson has contracts with its suppliers to purchase nylon material for $0.20 / square foot, zippers for $0.15 / foot, and titanium mix for $3.50 / pound. Benson adds water to the titanium mix and runs it through a machine to produce the rods for the tent. On average, it takes 2.5 pounds of the titanium mix to produce 10 feet of rods. Benson would need to purchase an additional machine, which can be purchased for $300,000 and would have the capacity to manufacture 800,000 feet of rods per year. It is estimated to have a useful life of 20 years.
As part of the manufacturing process, Benson will hire four full-time line workers (one for cutting, one for sewing, one for rod assembly, and one for painting). Each of the line workers are paid hourly at a rate of $12 / hour. Benson believes he can get by with four line workers as long as production of the Yukon is less than 7,500 tents / year. At that point, he will need to add two full-time line workers. Benson is open 2,100 hours per year.
Additionally, Benson plans to hire a production supervisor and a quality control supervisor as part of the manufacturing process. They will be paid on salary at $55,000 and $62,000, respectively. For the remainder of the other manufacturing costs, an Excel regression was calculated using number of tents sold as the independent variable. Here are the results:
1. Insurance on the facility = R2 = 0.95, y-int = 7,500, slope = 1.2
2. Utilities on the facility = R2 = 0.72, y-int = 3,850, slope = 6.75
Assume there is a flat income tax of 30%.