Problem
ABC Inc. will be producing a new line of smart robot vacuum. If the large factory is chosen, the cost per unit to produce each unit will be $190 while the cost per unit will be $240 for the small factory. The large factory would have fixed cash costs of $320,000,000 and a depreciation expense of $8,000,000 per year, while those expenses would be $160,000,000 and $4,000,000 in the small factory. Unit price is $920 for both projects.
1. Calculate the accounting operating profit break-even point for both factory choices for Twilight Candles.
2. Calculate the number of unit sales for which the accounting operating profit is the same, regardless of the factory choice. Interpret the result.
3. The company's marketing analysis suggests that there is a probability of 50% that the demand for this product is 3,300,000 units and a probability of 50% that the demand for this product is 2,300,000 units. What is the expected unit sales?
4. Given the results in b and c, discuss which factory option the company should choose?
5. ABC Inc. is also considering an investment strategy under capital rationing condition that works for a multiple period scenario. Matthew, the financial analyst of the company, suggests that choosing the projects with the highest profitability indices in the first period will generate the greatest aggregate NPV of all projects that the company will undertake in all periods. Do you agree with Matthew? Explain why?