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Marginal Cost

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You are considering expanding your line of equipment and apparel for high school athletic teams to include soccer teams. Based on research conducted by the Marketing department, you estimate an increase in sales for your division of $150,000 per year the first two years, then $250,000 per year over the following three years. In order to manufacture the necessary equipment, you will need to invest in some new manufacturing equipment that you estimate will cost $300,000. You figure that you will be able to manufacture the equipment and apparel utilizing your existing manufacturing staff and will not need to hire additional workers.

After gathering the information, you arranged a meeting with the Chief Financial Officer (CFO), Don Morgan. During the meeting Don listened to your proposal, reviewed your information, and stated that he would need to do some additional calculations to see if the capital project would fit into the firm's financial plan. Don used some terminology that you didn't quite understand. For example, he mentioned the time value of money, the company's cost of capital, market risk, weighted average cost of capital, and marginal cost of capital.

Dazed and confused, you walk back to the manufacturing plant in search of other division managers to find out what these terms mean. Required: Discuss the following questions with the other managers (your classmates):

What is the time value of money and how does it apply to this situation? How might you (as division managers) use the time value of money to make managerial decisions?
What is weighted average cost of capital and how does it impact the decision to expand your division?
What is marginal cost of capital and how does it impact the decision to expand your division?

Objective: Explain the importance of the marginal cost of capital (MCC) schedule in financial decision-making.
Use effective communication techniques.

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Solution Summary

The response addresses the queries posted in 423 words with references.

Solution Preview

The response addresses the queries posted in 423 words with references.

//Before writing about the marginal cost of the product, firstly we have to describe about the whole situation under the heading of introduction. //

Introduction

The sports department wants to increase its market share by expanding its line of products and services. For manufacturing the new equipments, the division has to make an investment of $300000 for manufacturing equipments. It doesn't require additional workers. The division is estimated an increase of sales by $150000 for first two years and $250000 in following three years. The CFO of the company wants to evaluate this project on the basis of time value of money, WACC, marginal cost of capital and market risk.

//Above we discussed about the entire situation and now we will talk about the next instruction, which is the time value of money. I am giving you an overview of the time value of money which will help ...

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Ashish Sharma, MBA (IP)
Education
  • MBA (IP), International Center for Internationa Business
  • BBA, University of Rajasthan
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