Spiral Company is a pasta company that specializes in fun-shaped pasta specifically marketed towards kids. Currently, they manufacture all of their pasta internally and purchase boxes from an external vendor for $0.58 per box. Carol, the manager of the Pasta department has big decisions to make for her department for the New Year as she creates a budget. One of their largest pasta-cutting machines will need to be replaced, and she finally found a great vendor who has offered to sell them a new model for $14,600. Carol has calculated the following estimates for the new machine: Each unit contains 16 ounces of pasta and requires one cardboard box in which it will be packaged and shipped. Carol has also been speaking with their internal packaging department about purchasing boxes from them. The manager of that department is going to put together a sales quote and has gathered the following information about their sales for the year: The negotiated price will be the minimum acceptable transfer cost. Spiral Company has a tax rate of 25%, a weighted average cost of capital of 6.6%, and a minimum required rate of return of 8.1%. Use the above information to answer the following questions.
a. What is the Return on Investment and Economic Value Added from the new machine? If repairing the existing machine would also cost $14,600 but it had no Economic Value Added, then which deal should Carol select?
b. What is the per-unit minimum acceptable transfer price and overall price quoted by the internal packaging department? Calculate the percentage difference between the quotes from the internal packaging department and the external vendor?
c. Which offer will Carol select for her department? What is the highest amount Carol should be willing to pay internally per unit before she should consider it to be a bad decision?

Question

Spiral Company is a pasta company that specializes in fun-shaped pasta specifically marketed towards kids. Currently, they manufacture all of their pasta internally and purchase boxes from an external vendor for $0.58 per box. Carol, the manager of the Pasta department has big decisions to make for her department for the New Year as she creates a budget. One of their largest pasta-cutting machines will need to be replaced, and she finally found a great vendor who has offered to sell them a new model for $14,600. Carol has calculated the following estimates for the new machine:  Each unit contains 16 ounces of pasta and requires one cardboard box in which it will be packaged and shipped. Carol has also been speaking with their internal packaging department about purchasing boxes from them. The manager of that department is going to put together a sales quote and has gathered the following information about their sales for the year:  The negotiated price will be the minimum acceptable transfer cost. Spiral Company has a tax rate of 25%, a weighted average cost of capital of 6.6%, and a minimum required rate of return of 8.1%. Use the above information to answer the following questions. 
a. What is the Return on Investment and Economic Value Added from the new machine? If repairing the existing machine would also cost $14,600 but it had no Economic Value Added, then which deal should Carol select?
b. What is the per-unit minimum acceptable transfer price and overall price quoted by the internal packaging department? Calculate the percentage difference between the quotes from the internal packaging department and the external vendor?
c. Which offer will Carol select for her department? What is the highest amount Carol should be willing to pay internally per unit before she should consider it to be a bad decision?

Quizplus · Accepted Answer

The Answer of Spiral Company is a pasta company that specializes in fun-shaped pasta specifically marketed towards kids. Currently, they manufacture all of their pasta internally and purchase boxes from an external vendor for $0.58 per box. Carol, the manager of the Pasta department has big decisions to make for her department for the New Year as she creates a budget. One of their largest pasta-cutting machines will need to be replaced, and she finally found a great vendor who has offered to sell them a new model for $14,600. Carol has calculated the following estimates for the new machine:  Each unit contains 16 ounces of pasta and requires one cardboard box in which it will be packaged and shipped. Carol has also been speaking with their internal packaging department about purchasing boxes from them. The manager of that department is going to put together a sales quote and has gathered the following information about their sales for the year:  The negotiated price will be the minimum acceptable transfer cost. Spiral Company has a tax rate of 25%, a weighted average cost of capital of 6.6%, and a minimum required rate of return of 8.1%. Use the above information to answer the following questions. 
a. What is the Return on Investment and Economic Value Added from the new machine? If repairing the existing machine would also cost $14,600 but it had no Economic Value Added, then which deal should Carol select?
b. What is the per-unit minimum acceptable transfer price and overall price quoted by the internal packaging department? Calculate the percentage difference between the quotes from the internal packaging department and the external vendor?
c. Which offer will Carol select for her department? What is the highest amount Carol should be willing to pay internally per unit before she should consider it to be a bad decision?

Spiral Company Is a Pasta Company That Specializes in Fun-Shaped