Tritan Ltd manufactures a range of heavy duty waterproof bags, primarily for sailors. Being located on a
Question:
Tritan Ltd manufactures a range of heavy duty waterproof bags, primarily for sailors. Being located on a remote island off the coast of Scotland, Tritan Ltd has trouble finding sufficient suitably trained staff. Following a recent relocation and training initiative the company has managed to increase its workforce to 36 machining staff, but they see no possibility of increasing this number in the next few years. A four year contract is being considered to supply a new bag for transporting wind turbines to off shore wind farms. The project will require an initial investment of £1.95 million and additional fixed costs of £270,000 will be incurred over each of the four years. Tritan Ltd’s cost of capital is 7% per annum. Each new bag will sell for £750, will require materials costing £175 and will take three days to machine and test. Tritan Ltd will only allocate one third of its machining staff to the production of this new bag. This will mean that they have to be taken off other work which will result in a loss in contribution of £140 per day (calculated after charging the £86 per day labour cost). The figures of £175 for materials and three days for machining are both estimates. Tritan Ltd expects to sell all the output that this team can produce in the 240 working days a year. It will take a member of staff three days to produce the first bag. Learning effects will cause this to fall according to the learning equation. The learning rate for Tritan Ltd’s staff is 88%, but learning stops once a member of staff has produced 45 bags.
Required:
(a) Using the learning rate given, calculate the production quantities for year one and years two to four of the potential contract. (Use 4 decimal places for the average time per bag and whole days for total time.)
(b) Calculate the NPV of the new bag contract using the production quantities calculated in part (a) and advise Tritan Ltd whether the contract should be accepted. [6 marks]
(c) Discuss other factors Tritan Ltd should consider before a final decision is made. [8 marks] [Total 20 marks] Extract from NPV tables: Cumulative Period 7% Period 7% 1 0.935 1 0.935 2 0.873 2 1.808 3 0.816 3 2.624 4 0.763 4 3.387 5 0.713 5 4.100
Expert Answer:
Part a Year 1 Number of bags produced 36 1 088 3 36 012 3 1296 Total time 1296 3 3888 days Year 2 Nu... View the full answer
