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Consider what to do with excess capacity from the four extra machines at GenieTech. If the machines ran for outside sales, it would cover some of the overhead costs, thereby reducing the per-unit cost of Bergerac Systems' cartridges. How would this approach affect the cost allocation for cartridge production? How might this affect the annual savings and the payback period? Consider at least two alternatives: (1) keep the extra four machines idle, or (2) run the machines for outside sales (GenieTech likely has longterm contracts in place with other customers). For option (2), your results and conclusion will largely depend on your assumptions, which makes this question difficult. Exhibit 4 Analysis of Backward Integration Options Exhibit 4 Analysis of Backward Integration Options (cont.) GenieTech In-House Comparison of Cost per Unit Labor Raw Materials Reagents Costs Overhead Contingency $1,143,6003,675,0005,390,6251,759,500$1,087,0003,560,1565,390,6251,073,40090,000 Annual Operating Cost $11,968,725 $11,201,181 Annual Production of Cartridges 4,687,500 4,687,500 Cost per Unit $2.553 Current Cost per Unit, Delivered Cost per Unit, Bergerac $2.960 $2.703 Includes delivery costs (transportation, fuel, handling) of $0.15/ unit Savings per Unit Annual Savings @ Current Production $0.257 $1,204,688 Capital Requirements Acquisition Price $5,750,000 Based on 5x EBITDA multiple Machinery \& Equipment Molding Machines Cost 375,000 Estimated cost for new Hitachi molding machine Molds 115,000 Cartridge cover and base molds for each molding machine Number of Molding Machines Installation Cost Quoted installation cost Auxiliary Equipment Contingency Allowance of 5% of total capital investment in equipment Building \& Building Equipment Total Capital Requirements $5,750,000 Savings per Unit $0.257 Break-Even Volume Annual Production Volume 22,373,541 4,687,500 Payback Period, Years 4.8