Byron Bay Cookie Company operates two bakehouses, one on the Gold Coast and the other in Byron Bay. There has been a reduction in demand for its products and it is no longer viable to operate both bakehouses. Management needs to decide which of the two it will discontinue to operate in the coming year. A preliminary investigation shows that the Gold Coast bakehouse is able to produce products at a faster rate than the Byron Bay bakehouse. However, this is because of an inefficient heating process. Transport costs are cheaper at the Gold Coast plant, as it is located closer to major suppliers. The following information relates to the two bakehouses for the past year: Gold Coast Byron Bay Average Direct Material cost per kilogram of cookies $3.50 $3.15 Other variable operating costs per kilogram of cookies $1.50 $0.75 Fixed cost of the bakehouse per annum $75 000 $55 000 Net cost of closing the plant $ 100 000 $80 000 Transport costs inward per kilogram of direct materials (included in variable operating costs above) $0.15 $0.38 Lost days due to injury per annum 56 21 Number of employees 56 39 Emissions per annum 60 tonnes 45 tonnes Waste disposal sent to landfill (per kilogram of cookies) 0.3 kilograms 0.1 kilograms Invested Capital $1 220 000 $820 000 Profits Generated $300 000 $250 000 Currently, both bakehouses produce 1 500 000 kilos of biscuits per annum, and both plants have equipment that can be used for another five years with no residual value. Required: Calculate the annual running cost of the two plants, return on investment (ROI) and evaluate which seems more efficient from a financial perspective. What social and environmental factors might you also consider in assessing which plant should be retained (please list 3 in total)? What would be your final recommendation?
Byron Bay Cookie Company operates two bakehouses, one on the Gold Coast and the other in Byron Bay. There has been a reduction in demand for its products and it is no longer viable to operate both bakehouses. Management needs to decide which of the two it will discontinue to operate in the coming year.
A preliminary investigation shows that the Gold Coast bakehouse is able to produce products at a faster rate than the Byron Bay bakehouse. However, this is because of an inefficient heating process. Transport costs are cheaper at the Gold Coast plant, as it is located closer to major suppliers. The following information relates to the two bakehouses for the past year:
|
|
Gold Coast |
Byron Bay |
|
Average Direct Material cost per kilogram of cookies |
$3.50 |
$3.15 |
|
Other variable operating costs per kilogram of cookies |
$1.50 |
$0.75 |
|
Fixed cost of the bakehouse per annum |
$75 000 |
$55 000 |
|
Net cost of closing the plant |
$ 100 000 |
$80 000 |
|
Transport costs inward per kilogram of direct materials (included in variable operating costs above) |
$0.15 |
$0.38 |
|
Lost days due to injury per annum |
56 |
21 |
|
Number of employees |
56 |
39 |
|
Emissions per annum |
60 tonnes |
45 tonnes |
|
Waste disposal sent to landfill (per kilogram of cookies) |
0.3 kilograms |
0.1 kilograms |
|
Invested Capital |
$1 220 000 |
$820 000 |
|
Profits Generated |
$300 000 |
$250 000 |
Currently, both bakehouses produce 1 500 000 kilos of biscuits per annum, and both plants have equipment that can be used for another five years with no residual value.
Required:
- Calculate the annual running cost of the two plants,
return on investment (ROI) and evaluate which seems more efficient from a financial perspective.
- What social and environmental factors might you also consider in assessing which plant should be retained (please list 3 in total)? What would be your final recommendation?
- Use lean principles to identify two (2) potential improvements to their business operations that could add value to the company and its customers. Clearly state the improvement and the value/benefit it could deliver.
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