Your company has the opportunity to set up a SBU to manufacture solar panels. Your company's cash flow is very tight so you want to be sure that this endeavor will at least pay for itself. The SBU can lease an existing plant for one year only. There is an existing building on the site but you will need to convert the facility to manufacture the panels. Here are the specifics of the case (keep in mind I have simplified this scenario): Assumptions:
• Annual lease cost $75,000
• Plant Conversion cost $150,000
• Variable costs to produce each unit $50.00
• Local Value Added Tax 7.5%
• Royalty $3.50
• Projected Sales price $75.00 The royalty is paid on a per unit basis (regardless of sales price) to the original patent holder on the technology you need to manufacture these solar panels. The VAT is based on the margin between the revenue and variable production costs. For this exercise assume that the VAT is neither a variable or fixed cost, but it does need to be figured into the analysis in the final profit margin. Also for this exercise assume there are no income taxes. Please answer the following questions about this endeavor. You must use an Excel spreadsheet for this exercise and include it with your submission. Include all formulas in your answers.
1. If you could sell 10,000 units in this year of operations, would you undertake the project?
2. If you could sell 15,000 units in this year of operations, would you undertake the project?
3. What volume of units sold would you need to sell to breakeven on your cash flow for the year?
4. If you could sell only 6,000 units for the year but the market would allow you to raise your sales price; what is the average sales price you would need to breakeven on your cash flow?
5. If you could lease the building for 2 years instead of only 1 year, how would this impact your economics?
6. What volume would you need to sell annually to breakeven if this was a 2 year project?