1) Rowe Pottery designs and makes specialized gift quality pottery. Rowe is considering manufacturing its own clay. Currently, the cost to buy clay is $2.65 per pound. If Rowe were to make the clay, three raw materials would have to be purchased. The raw materials are used in equal quantities (Mat 1 cost $.25/lb, Mat 2 cost $.43/lb and Mat 3 cost $.70/lb) and three pounds of raw materials makes three pounds of clay. The clay would be mixed in a large vat for proper curing and consistency. Three employees ($15/hour labor and benefits) would be needed to monitor each batch of clay which takes 10 hour and yields 500 pounds of clay. Variable overhead would consist of additional maintenance on the required equipment and storage of the unfinished clay and would total $620 per batch of clay. The clay could be produced in the current facility but would result in approximately $90,000 of additional inventory on hand at any given time. Currently, Rowe buys 250,000 pounds of clay each year. What is the return on investment if Rowe decides to make its own clay? Should they make the clay? Explain.
2) Pottery throwers are paid $30 per hour and can throw approximately 6 pieces per hour. Using the costs above for clay, the average pot requires 6 lbs of clay each (use the cost of clay determined above) All pottery must be fired in a kiln to harden. Every firing takes 10 hours of set up and 3 hours of take down ($15/hr) and yeilds 38 pieces of pottery. The kiln in 2011 used 235,000 therms of gas at $.22 per therm and was fired 930 times (which is the projection also for 2012). The kiln cost $150,000 in 2007 and is being depreciated over 10 years with no salvage value using the straight line method. Each piece of pottery is also decorated at a rate of 4 pots per hour with decorators costing $22 per hour. Shipping and handling usually cost $6 per piece. The production manager’s salary is $91,000 per year and selling costs are fixed around $126,000 per year. Rowe receives a special order for 5,000 Christmas pots that will be picked up at the factory cutting shipping and handling costs in half. Also, the decorating needs on these pots will take half as long as usual. The customer is offering $37 per pot (regular price is $58). Should Rowe take the order? Show your computations. Explain your conclusion.
3) Wilson Athletic has developed a new golf ball that consistently flies 20% further than their old balls. With the worldwide market for golf balls at 3 million dozen, Wilson believes their new ball is revolutionary enough to capture 8% of that market in the first year and 16% in the second through fifth year of production. Wilson plans on selling this ball at premium to the price of other balls at $31 per dozen. However, variable costs per dozen are also relatively high due to the specialized nature of the manufacturing-$21. To reach their sales goals, Wilson plans to pay $1.5 million in advertising and $2.2 million in player endorsement contracts each year that Wilson makes the ball. Wilson will also have to add on to its existing factory and add new equipment that will (in total) cost $2.2 million. This facility will require $250,000 in utilities and maintenance per year of manufacturing. This building and equipment will have a five year life and can be sold for $50,000 at the end of five years. Wilson’s tax rate is 40% and discount rate/cost of capital is 12%. What is the NPV and IRR for the new golf ball project? Should Wilson proceed with the project?
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