ability to double the amount of products

10:36UManitobauniversityofmanitoba.desire2learn.comTTIC TOUTOU TO UUTETTYoperates at capacity, manufacturing400,000 products annually that areultimately sold in CHI stores withinthe fiscal year. The facility waspurchased for $7,000,000 ten yearsago. With the expansion, CHI willhave the ability to double the amountof products it can produce. Thecompany expects to increaseproduction by 75% in the first year ofexpansion, followed by a steadyannual 10% growth based only onincremental production (.e., 10%growth excluding the original facilitycapacity). The average apparelproduct manufactured will be sold for$30, and the price is expected toincrease by inflation annually, whichis forecasted to be a steady 2% overthe next ten years.The direct materials and direct labourused to manufacture these productsare 23% and 25% of sales,respectively. These costs as apercentage of sales are expected toremain consistent over the timehorizon. Six additional supervisorswith fixed salaries of $100,000 peryear are also required. Insurance forthe additional facility space andequipment is $80,000 per year.Other incremental manufacturingoverhead costs (property taxes,maintenance, security, etc.) excludingdepreciation are estimated to be$500,000 annually. Wages areexpected to increase with inflationover the time period, while other fixedcosts are expected to remain steady.3CHI would also need to purchase anadditional seven delivery trucks forthe incremental deliveries. The truckswould cost $100,000 each and wouldrequire $10,000 each in insuranceannually. Transportation variablecosts (gas, truck driver salaries, etc.)are estimated to be 15% ofincremental revenue.


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