Question: A company is thinking about changing the layout of the facilities with these estimations in mind:
- Machine moving and reintallation will cost $100,000
- Total sales will increase by 20% to $1,200,000 b/c of a decrease in production cycle time required under the new plant layout. Average contribution margin (sales dollars - flexible costs) is 31% of sales.
- Inventory-related costs will decrease by 25% because of an expected decrease in work-in-process inventory. Currently, the annual average carrying value of work-in-progress inventory is $200,000. The annual inventory financing cost is 15%.
Should the company implement the proposed changes in layout?
| |
Keeping Current Facility |
New Layout of Facility |
Difference |
| Moving Machine and reinstallation |
$0 |
100,000 |
|
| Sales |
1,000,000 |
1,200,000 |
|
| Inventory Related Costs |
$200,000 |
$150,000 |
|