The Raleigh Soap Company has been offered a5-year contract

Chapter , Problem 15-29

(choose chapter or problem)

The Raleigh Soap Company has been offered a5-year contract to manufacture and package a lead- ing brand of soap for Taker Bros. It is understoodthat the contractwill notbe extendedpastthe 5 yearsbecause Taker Bros. plans to build its own plant nearby. The contract calls for 10,000 metric tons(one metric ton equals 1000 kg) of soap a year.Raleigh normally produces 12,000 metric tonsof soap a year, so production for the 5-yearperiod would be increased to 22,000 metric tons.Raleigh must decide what changes, if any, to maketo accommodate this increased production. Fiveprojects are under consideration.Project 1:Increase liquid storage capacity.Raleigh has been forced to buy caustic sodain tank truck quantities owing to inadequatestorage capacity. If another liquid caustic sodatank is installed to hold 1000 cubic meters, thecaustic soda may be purchased in railroad tankcar quantities at a more favorable price. Theresult would be a saving of 0.1?c per kilogramof soap. The tank, which would cost $83,400,has no net salvage value.Project 2:Acquire another sulfonation unit.The present capacity of the plant is limitedby the sulfonation unit. The additional 12,000metric tons of soap cannot be produced with-out an additional sulfonation unit. Anotherunitcan be installed for $320,000.Project 3:Expand the packaging department.With the new contract, the packaging depart-ment must either work two 8-hour shifts orhave another packaging line installed. If thetwo-shift operation is used, a 20% wage pre-mium must be paid for the second shift. Thispremium would amount to $35,000 a year. Thesecond packaging line could be installed for$150,000. It would have a $42,000 salvagevalue at the end of 5 years.Project 4:Build a new warehouse. Theexisting warehouse will be inadequate forthe greater production. It is estimated that400 square meters of additional warehouseis needed. A new warehouse can be builton a lot beside the existing warehouse for$225,000,including the land.The annualtaxes,insurance, and other ownership costs wouldbe $5000 a year. It is believed the ware-house could be sold at the end of 5 years for$200,000. Project 5:Lease a warehouse. An alternativeto building an additional warehouse would beto lease warehouse space. A suitable ware-house one mile away could be leased for$15,000 per year. The $15,000 includes taxes,insurance, and so forth. The annual cost ofmoving materials to this more remote ware-house would be $34,000 a year.The contract offered by Taker Bros. is a favor-able one, which Raleigh Soap plans to accept.Raleigh managementhasseta 15%before-tax mini- mumattractiverateofreturnasthecriterionforanyofthe projects.Which projects shouldbe undertaken?