World of Cakes Ltd, a cake retailer, is considering leasing a machine from a leasing company to make cakes that have photographic images on them. The company is considering leasing one of three alternative machines

World of Cakes Ltd, a cake retailer, is considering leasing a machine from a leasing company to make cakes that have photographic images on them. The company is considering leasing one of three alternative machines:

1. The Kacky Cake Machine makes cakes with lower quality ingredients. This machine is manufactured overseas in a factory that produces a lot of pollution. The costs per cake are: Ingredients $4 per 500gram, $4 labour and $0.40 packaging. It costs $10,000 per year to lease the Kacky Cake Machine.

2. The Cake Machine Desire makes cakes with higher quality ingredients. This machine is made in Australia and has been manufactured with little impact on the environment. The costs per cake are:  ingredients $5 per 500 gram, $4 labour and $0.40 packaging. The Cake Machine Desire’s leasing cost per year is $10,000. Regardless of which machine is used the selling price of the cakes will be $30 each. All machines have a yearly maximum capacity of 12,000 cakes. Tax rate = 30 %

REQUIRED:

a. Using CVP analysis, calculate the annual breakeven point for each cake making machine.

b. Calculate the before and after tax profitability of each cake making machine at full capacity per year.

c. The owner, Sarah, wishes to maximise profitability and minimise risk. Sarah also wants to sell high quality cakes as she wants to position her business in the high end of the cake industry with a reputation of being environmentally friendly. After considering the information available, she has decided to choose Cake Machine Desire. Briefly apply the facts of the case and calculations in part a and b to the steps in the decision making model you studied at the start of this course to analyse the conflict that Sarah faces between the two alternatives using the concepts of qualitative and quantitative goals, efficiency and effectiveness.

d. Sarah has been offered the right to purchase the Cake Machine 2 outright today for $34,000 cash.

(i) Using the tables in the appendix do the appropriate calculations to compare the three alternate finance methods.

(ii) Which alternative should Sarah choose to pay for the cake machine? Why?

                                                    

The machine’s manufacturer will allow her to buy it through instalments of $5 000 every quarter for 2 years. Sarah can also organise a loan with DAS Bank where she can make payments every 2 months of $2 000 over 2 years. (It is expected that the average time value of money over this time that is the discount rate will be 12% p.a.).
 CLICK HERE FOR SOLUTION