Two new alternatives have come up for expanding Grandmother’s Chicken Restaurant (see Solved Problem 2). They involve more automation in the kitchen and feature a special cooking process that retains the original-recipe taste of the chicken. Although the process is more capital intensive, it would drive down labor costs, so the pretax profit for all sales (not just the sales from the capacity added) would go up from 20 to 22 percent. This gain would increase the pretax profit by2 percent of each sales dollar through $800000 (80.000 meals x $10) and by 22 percent of each sales dollar between $800,000 and the new capacity limit. Otherwise, the new alternatives are much the same as those in Example 6.2 and Solved Problem 2.
• Alternative 1: Expand both the kitchen and the dining area now (at the end of year 0), raising the capacity to 130,000 meals per year. The cost of construction, including the new automation, would be $336,000 (rather than the earlier $200,000).
Alternative 2: Expand only the kitchen now, raising its capacity to 105,000 meals per year. At the end of year 3, expand both the kitchen and the dining area to the 130,000 meals-per-year volume, Construction and equipment Costs would be $424,000, with $220,000 at the end of year c) and the remainder at the end of year 3. As with alternative 1, the contribution margin would go up to 22 percent.
With both new alternatives, the salvage value would be negligible. Compare the cash flows of all alternatives. Should Grandmother’s Chicken Restaurant expand with the new or the old technology? Should it expand now or later?