The Hamilton Flour Company is currently operating its mill six days a week, 24 hours a day on 3 shifts. At current prices, the company could easily obtain a sufficient volume of sales to take the entire output of the seventh day of operation each week. The mill’s practical capacity is 6,000 hundredweight (cwt) of flour per day.
• Flour sells for $12.40 a cwt and the price of wheat is $4.34 a bushel. About 2.35 bushels of wheat are required per cwt of flour. Fixed costs now average $4,200 a day (or $0.70 per cwt). The average variable cost of mill operations, almost entirely wages, is $0.34 per cwt).
• With Sunday operation, wages would double for Sunday work. Total fixed costs (actually semi fixed) per week would increase by $420 (total of $4620 for Sunday and $4200 for the other 6 days) if the mill were to operate on Sunday.
a. Using the information provided, compute the break even volumes for 6 day and 7 day operations.
b. Compute the average total cost per cwt for the 6 day operation and the net profit margin per cwt before taxes.
c. Would it be economical for the mill to operate on Sundays? Please justify your answer.
d. The mill superintendent is worried that if the mill operates 7 days per week overall labor productivity will decrease an additional 5 to 20%. If this happens would you operate the mill on Sunday? Please justify your answer
e. The sales people are also worried that long tern 7 day operation may negatively impact the sales price, again by 5 to 20%. If this happens would you operate the mill on Sunday? Please justify your answer
f. Which of the two risks has the greatest potential impact? Why?
g. There is a new piece of equipment that would not only improve productivity by 15% but also be able to reduce labor needed by 10%. The equipment costs $500,000. If the company has a simple payback period of 2 years, would you recommend this equipment or not? As always, please verify your answer.