The T H King Company Has Introduced a New Product Line That

question 49

Essay

The T. H. King Company has introduced a new product line that requires two work centers, A and B for manufacture. Work Center A has a current capacity of 10,000 units per year, and Work Center B is capable of 12,500 units per year. This year (year 0), sales of the new product line are expected to reach 10,000 units. Growth is projected at an additional 1,000 units each year through year 5. Pre-tax profits are expected to be $30 per unit throughout the 5-year planning period. Two alternatives are being considered:
1) Expand both Work Centers A and B at the end of year 0 to a capacity of 15,000 units per year, at a total cost for both Work Centers of $200,000;
2) Expand Work Center A at the end of year 0 to 12,500 units per year, matching Work Center B, at a cost of $100,000, then expanding both Work Centers to 15,000 units per year at the end of year 3, at an additional cost at that time of $200,000.
The King Company will not consider projects that don't show a 5th year positive net present value using a discount rate of 15%. What are the pre-tax cash flows for the two alternatives compared to the base case of doing nothing for the next five years, and what action, if any, should the company take?

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Definitions:

Flexibility

The ability of a supply chain to adjust its operations and adapt to changes, including demand variability, supply disruptions, and market conditions.

Supply Chain Managers

Are professionals responsible for overseeing and managing every stage of the production flow, from the acquisition of raw materials to the delivery of the final product.

Offshoring

The practice of relocating business operations from the home country to another country, often to take advantage of lower labor costs.

Total Cost

The aggregate expense associated with producing or acquiring goods or services, including fixed and variable costs.