Show all your work, marks are awarded for more than just the final answer. Please ensure that
Question:
Show all your work, marks are awarded for more than just the final answer. Please ensure that it is clear where your numbers are coming from. You can achieve clarity in your calculations by showing all the steps in the calculation process, using the appropriate headings and using formulas whenever possible.
Yeti Mugs Incorporated (YMI) is a manufacturing company with two distinct divisions. The two divisions that exist at YMI are the Manufacturing Division and the Finishing Division. The Manufacturing Division is where all of the mugs are produced from raw materials. The Finishing Division is where the mugs are cleaned, quality checked and then packaged for sale.
The financial details for each of the divisions are as follows:
Manufacturing
- Each mug requires 0.5kg of aluminum
- A kilogram of aluminum has a market cost of $6.50
- Each mug requires 20 minutes of direct labour to finish
- An hour of direct labour in the Manufacturing Division is $30.00
- Manufacturing overhead is applied at $7.25 per direct labour hour
Finishing
- Each mug goes through a quality inspection which takes 15 minutes
- An hour of direct labour in the Finishing Division is $22.00
- Each mug is packaged in one (1) box
- Each box costs $1.00
- Manufacturing overhead is applied at $9.85 per direct labour hour
YMI has made the following assumptions about the operations in each respective division:
Manufacturing
- The price of aluminum will remain constant over the next four (4) years
- The price of packaging will remain constant over the next four (4) years
- Direct labour will increase by 10% per year for each of the next four (4) years in both divisions
- Manufacturing overhead will increase by $0.75 per direct labour hour each year for the next four (4) years in both divisions.
YMI believes that they can sell according to the following schedule:
- 40,000 mugs at $49.99 in Year 1
- 50,000 mugs at $49.99 in Year 2
- 80,000 mugs at $59.99 in Year 3
- 120,000 mugs at $79.99 in Year 4
Along with the variable costs, there are $400,000 of fixed costs which the company will incur on an annual basis. This cost is not expect to increase over the next four years.
Foundations of Financial Management
ISBN: 978-1259024979
10th Canadian edition
Authors: Stanley Block, Geoffrey Hirt, Bartley Danielsen, Doug Short, Michael Perretta