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Case study - Ned and Larry's Ice Cream Company
Ned and Larry's Ice Cream Company produces specialty ice cream and frozen yogurt in pint-sized containers. The latest annual performance report praised the firm for its progressive policies but noted that environmental issues like packaging disposal were a concern. In an effort to reduce the effects of consumer disposal of product packaging, the report stated that Ned and Larry's should consider the following proposals:
Proposal A - Package all ice cream and frozen yogurt in quart containers.
Proposal B - Package all ice cream and frozen yogurt in half-gallon containers.
By packaging the product in containers larger than the current pints, the plastic-coated bleached sulfate board containers will hold more ounces of product per square inch of surface area. The net result is less discarded packaging per ounce of product consumed. Additional advantages to using larger containers include lower packaging costs per ounce and less handling labor per ounce.
Changing to a larger container requires redesign of the packaging and modifications to the filling production line. The existing material-handling equipment can handle the pints and quarts, but additional equipment will be required to handle half-gallons. Any new equipment purchased for proposals A and B has an expected useful life of six years. The total capital investment for each proposal is shown in the accompanying table. The table summarizes the details of these proposals, as well as the current production of pints.
|
Current (Pints) |
(A) Quarts |
(B) Half-Gallons |
Capital investment |
$0 |
$1,200,000 |
$1,900,000 |
Packaging cost per gallon |
$0.256 |
$0.225 |
$0.210 |
Handling labor cost per gallon |
$0.128 |
$0.120 |
$0.119 |
Postconsumer landfill contribution |
6,500 |
5,200 |
4,050 |
Because Ned and Larry's promotes partnering with suppliers, customers, and the community, they wish to include a portion of the cost to society when evaluating these alternatives. They will consider 50% of the postconsumer landfill cost as part of the costs for each alternative. They have estimated landfill costs to average $20 per cubic yard nationwide.
Ned and Larry's uses a MARR of 15% per year and IRR analyses to evaluate capital investments. A study period of six years will be used, at which time the equipment purchased for proposals A and B will have negligible market value. Production will remain constant at 10,625,000 gallons per year.
(a). Determine whether Ned and Larry's should package ice cream and frozen yogurt in pints, quarts, or half-gallons. (b). Determine what is the lowest average unit cost. (c). Please give a reasonable selling price if Ned and Larry's uses depreciation method of the 200% DB method with switchover to the SL method on the packaging equipments, considering income taxes. Sensitivity analysis is appreciative.
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