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# Finance: Carl's Custum Candles Capacity Requirements

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1) Carl's Custom Candles manufactures small batches of candles for local retail shops. Carl has established a relationship with 3 local shops, and needs to determine how many candle making machines to purchase. Details of the customers' order requirements are shown below. Analyze Carl's capacity requirements and answer the questions below. Assume that Carl's runs a make-to-order process (no inventory of finished candles is carried) and that Carl is restricted to operating 5 days per week, 8 hours per day.

Shop A Shop B Shop C
Annual Demand (candles) 200,000 400,000 100,000
Standard Processing Time (hours/100 candles) 2 2.5 1.75
Average Order Quantity (candles/order) 1,000 500 2,500
Standard Setup Time (hours) 2 1 5

A. If the capacity cushion Carl desires is 20%, how many candle machines should he have?
B. What is the total processing time for orders from Shop B (for one year)?
C. Which shop uses the largest portion of Carl's capacity?
D. If Carl reduces his capacity cushion to 15%, will the number of required machines change?
E. How many machines are required to serve the business from Shop A (with a 20% capacity cushion)?

2) You have just been hired as the production manager for the Giant Gum company. As your first order of business, you decide that you should evaluate the current status of your production capacity. Last year the factory produced 500,000,000 sticks of gum (working 365 days per year, 24 hours per day when necessary).
You investigate the three most important pieces of equipment and make the following observations:
-The gum mixer (Machine 1) will hold 1000 pounds of materials and takes 1 hour to mix a batch. Cleanup (mandated by the Food and Drug Administration) following each mixing requires 30 minutes.
-The machine that forms the gum into sticks (Machine 2) can process 20,000 pounds per day. There is no cleanup/setup required for this piece of equipment.
-The machine that packages the gum (Machine 3) can process 1,500,000 sticks of gum per day. Each stick of gum weighs 0.01 pound.
Using this information, answer the following questions

A. Which piece of equipment has the highest utilization?
B. What is the utilization rate for the packaging machine?
C. If the desired maximum level of utilization is 80%, which steps need additional capacity?
D. If output decreases to 400,000,000 sticks of gum per year, what will the utilization for the mixer be?
E. Given the current capacities for each machine, would increasing the capacity of Machine 2 increase the overall capacity of the plant?

3)Uncle Max's Pony Rides offers youngsters the opportunity to experience their first pony ride in a controlled atmosphere. Unfortunately, ponies require a significant amount of pasture space. Max currently has 20 ponies, which is the maximum number he can keep on his 100 acre farm. With 20 ponies, Max can offer as many as 160 rides per day (8 per pony). Max currently operates 360 days per year. Recently, a neighboring farm, with 50 acres of pasture, has become available for a price of \$100,000 (the purchase would be finalized in late 2012 and Max could start using the land at the beginning of 2013 - assume that the land payment will be due in 2013). Max is pondering two possible courses of action: 1) Do nothing 2) Purchase the land and immedately purchase 10 more ponies to allow him to serve more customers. Consider the information shown to the right and answer the questions below.

A. Assuming Max purchases the property and the 10 new ponies, what is the cash flow in 2013?
B. For the purchase option, what is the total cash flow for the years 2013-2017? Revenue
C. If Max wants at least a 10% return on his investment, should he pursue the expansion? Price per ride \$20
D. If Max can delay the purchase, when should he purchase the land and expand?
E. If the price of \$100,000 is no longer offered, what is the maximum amount Max should be willing to pay for the land (assume that Max will only consider the 5 year time horizon in this decision and that the land has no residual value when the 5 years have expired). Max has determined that his cost of captial is 10% per year.
Costs (per pony per year)
Food \$1,000
Vet \$500

Cost to purchase a new pony
\$7,500

Expected Demand
2013 40000
2014 45000
2015 50000
2016 55000
2017 60000
Cash Flow Analysis
With purchase
Land Ponies Revenue Expenses Cash Flow
2013 \$100,000
2014
2015
2016
2017

without
Without Purchase
Land Ponies Revenue Expenses Cash Flow
2013
2014
2015
2016
2017.