Reference no: EM132249418
Titan Manufacturing operates a plant in Waupaca, Wisconsin, that produces three types of fence wire: Standard Copper, Multistrand Nickel, and Special Strength Steel. The current contribution margin per ton of each product and the optimal monthly production quantities are:
Product $CM/ton Tons in optimal monthly production plan
Standard copper $10.50 28,333
Multistrand Nickel $22.00 15,333
Special Strength Steel $12.00 3,200
The contribution for this production plan is $673,233 per month. With this production plan, there is no idle capacity within the Waupaca plant.
New electric-fence technology requires a high-conductivity (HC) wire. If Titan Manufacturing decides to enter this market it would have to produce the wire at the Waupaca plant on the same equipment producing the three existing products.
Waupaca engineers expect producing the new wire to require $45.00 per ton of materials, $23.00 per ton of direct labor, and $7.50 per ton of variable overhead costs. Salespeople would receive a $7.50 per ton commission, regardless of sales price. Titan Manufacturing also allocates selling expenses and general administrative expenses to products at a rate of 25% and 35% of factory costs.
Marketing predicts that if Titan Manufacturing sets a price of $250 per ton for HC wire it can sell up to 1,000 ton.
Titan Manufacturing has determined that, with the addition of HC wire, the optimal monthly production plan, with a contribution of $768,678 per month, is
Product Tons in optimal monthly production plan
Standard copper 22,111
Multstrand nickel 13,778
Special strength steel 5,533
High conductivity 1,000
A. Equipment renovations and additions to create the capability to produce the highconductivity wire would cost $2,000,000, with installation costs expected to be $500,000 and training expenses $250,000.
Assume that Titan Manufacturing pays taxes at the 40% rate and typically uses a 20% hurdle rate for major investments. Assume you are prepared to recommend this investment from a Stage 1 perspective. What is the minimum number of years for which you are assuming the product mix including HC wire will persist?
Note that you will need to adjust depreciation this time, since you are analyzing the effect of your ex ante assumption about the project’s economic life. In your analysis, be sure to pay attention to the time frame of the various pieces of information and analysis.
B. How much would Titan Manufacturing be willing to pay for a patent on a process to manufacture high-conductivity wire if the company were unsure that a market for the product would truly develop? Assume the market situation will be clear within three years and the patent would allow the company to make the plant changes described above and have the lowest variable costs for the next seven years. In recent years, new product returns in the security industry have had a standard deviation of 37%.