Marketing has come up with a new product line for the company. They expect average annual revenue of 25 million USD for the first three years while there will be an increase of 10% in annual revenue from years four to six. Manufacturing cost is expected to be 60% of the annual revenue. A new production line will be needed to be set up, which includes the warehouse to store the raw materials and finished goods. The cost to build the warehouse should be no more than 5% of the total investment cost to set up the new production line. Total investment is projected to be at 100 million USD, inclusive of the warehouse build cost. Assume MARR = 12%.a. Should the company proceed with producing the new product line?You have the option to rent though and are looking at a warehouse in Sta. Rosa, Laguna. The broker is giving it to you for 1 million USD every year with an increase in rent of 7% every year.b. Assuming that the answer to letter (a) is that the project is profitable, which option will be better: constructing or renting the warehouse?

No, the company should not proceed with a new product line. Here is the working is shown below:…

Answered: Marketing has come up with a new…

Principles of Accounting Volume 2

19th Edition

ISBN:9781947172609

Author:OpenStax

Publisher:OpenStax

Chapter3: Cost-volume-profit Analysis

Section: Chapter Questions

Problem 10EB: Keleher Industries manufactures pet doors and sells them directly to the consumer via their web...

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Marketing has come up with a new product line for the company. They expect average annual revenue of 25 million USD for the first three years while there will be an increase of 10% in annual revenue from years four to six. Manufacturing cost is expected to be 60% of the annual revenue. A new production line will be needed to be set up, which includes the warehouse to store the raw materials and finished goods. The cost to build the warehouse should be no more than 5% of the total investment cost to set up the new production line. Total investment is projected to be at 100 million USD, inclusive of the warehouse build cost. Assume MARR = 12%.

a. Should the company proceed with producing the new product line?

You have the option to rent though and are looking at a warehouse in Sta. Rosa, Laguna. The broker is giving it to you for 1 million USD every year with an increase in rent of 7% every year.

b. Assuming that the answer to letter (a) is that the project is profitable, which option will be better: constructing or renting the warehouse?

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