Scenario 4.7 The B. Sharp Company Has a Rapidly Growing Product Line

question 21

Multiple Choice

Scenario 4.7
The B. Sharp Company has a rapidly growing product line that requires two work centers, X and Y for manufacture. Work Center X has a current capacity of 50,000 units per year, and Work Center Y is capable of 55,000 units per year. This year (year 0) , sales of the product line are expected to reach 50,000 units. Growth is projected at an additional 3,000 units each year through year 3. Pre-tax profits are expected to be $60 per unit throughout the 3-year planning period. Two alternatives are being considered:1) Expand both Work Centers X and Y at the end of year 0 to a capacity of 60,000 units per year, at a total cost for both Work Centers of $500,000;
2) Expand Work Center X at the end of year 0 to 55,000 units per year, matching Work Center Y, at a cost of $300,000, then expanding both Work Centers to 60,000 units per year at the end of year 2, at an additional cost at that time of $350,000.
The Sharp Company will not consider projects that don't show a 3rd year positive net present value using a discount rate of 20%.
-Use the information in Scenario 4.7. What action, if any, should the Sharp Company take?

• A) Do nothing-neither alternative provides a positive net present value after three years.
• B) Select Alternative #1.
• C) Select alternative #2.
• D) Either alternative may be selected, since the positive net present values are the same after three years.

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Definitions:

Power

The ability of one person to influence another.

Formal Group

An organized collection of individuals with a defined structure that is established to achieve specific goals.

Organizational Boundaries

Limits that define an organization's structure, roles, and responsibilities, and separate it from its environment and other organizations.

Grapevine Network

An informal communication network within an organization, characterized by the personal, unofficial sharing of information among employees.