Reference no: EM132607487

Proposed Winnipeg Arena deal

• The Winnipeg Arena has approached KBL to supply white buns for all events hosted at the arena for a period of five years. The deal requires 50 dozen white buns per day, every day, at a discounted rate of $2.99 per dozen for the entire five-year period. If this level of service is not met, KBL would be subject to a penalty.
• As part of the agreement, KBL will be required to use Bouquet flour, a key sponsor of the Winnipeg Arena. Bouquet is a local flour mill that is known for late delivery and quantity discrepancy on its orders.
• Given our existing capacity constraints, we would need to invest in the additional oven and a "Rex machine," a specialized piece of equipment that shapes the buns. A Rex machine will cost $100,000 and requires annual recalibration at a cost of $5,000 per year.
• The Rex machine can produce 60 dozen buns per hour. With the Rex machine, it would only take 12 minutes to shape a batch of buns, which would reduce the variable cost per batch of buns to $34.25 due to decreased labour costs. This machine comes from Switzerland, and we would have to bring over one of their technicians if it ever required repair.
• KBL uses a 12% weighted average cost of capital when evaluating these types of investments. The tax impact can be ignored for the purpose of this calculation.

Question 1: What is the financial implications of supplying buns to the Winnipeg Arena?

Question 2: What are the qualitative factors of the Winnipeg Arena deal?