Glenn Moore identified three options for increasing capacity at Hightec. The first is to renew the rental
Question:
Glenn Moore identified three options for increasing capacity at Hightec. The first is to renew the rental contract on the current facility for another 5 years and rent portable units to ease the cramped conditions. He discarded this option as being inadequate for a growing problem. The second option is to purchase land and build a new 19,000- square-foot facility. The most attractive site would cost $100,000 for land, and the construction cost is estimated at $40 per square foot. His cost of capital is about 15 percent.
The third option is to renew the rental contract on the current building for another 5 years and rent an adjacent 7,000-square-foot building only 30 feet from the current one. The rental cost of both buildings would be $2,800 per month. Moore’s choice of this third option would necessitate building a $15,000 corridor connecting the buildings. However, Moore estimates the relocation costs (such as for moving and installing the machines and the loss of regular-time capacity) to be $20,000 less than with the second alternative.
The Layout
Regardless of which option Moore chooses, he must improve on the existing layout. It suffers in terms of materials handling costs and departmental coordination. When Moore initially designed the existing layout, he located the office first and then fit the other departments around it as best he could. The main consideration for the other departments was not to have the machine shop next to the cleaning room. Moore put together the information needed for planning the new layout, as shown in Exhibit 1 and Exhibit 2. The projected area requirements should be sufficient for the next 5 years. Both layouts provide for 19,000 square feet. The closeness matrix emphasizes materials handling and communication patterns.
Glenn Moore walked back to the office with a fresh cup of coffee in his hand. He hated hot chocolate, and it was too early for soup. He wondered what he should do next. Whatever the choice, he wanted a more attractive work environment for the engineering and supply chain management staffs, currently located in a cramped, open- office setting. Attracting creative people in these areas had been difficult. He made a mental note that the adjacent building also is quite drab.
Required:
Which expansion option would you recommend to Glenn Moore? Justify your position.
Foundations of Financial Management
ISBN: 978-1259024979
10th Canadian edition
Authors: Stanley Block, Geoffrey Hirt, Bartley Danielsen, Doug Short, Michael Perretta