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[SOLVED] Chester Corporation is considering adding capacity to their Cake product, currently automated to 7.0

Chester Corporation is considering adding capacity to their Cake product, currently automated to 7.0. Assume: - They will use the new capacity next year to make and sell 200 additional units (000). - Each unit of capacity will cost $34.00. - Cake's price will be unchanged at $34.00. - Material costs will remain $13.04 next year. - Labor costs will remain $5.34 on first shift, and $7.91 on second shift. - Bond interest will remain 12.3% next year. - Depreciation will be straight line over 15 years. - SG&A costs can be ignored because they would be the same with or without the new capacity. Which of the following tactics will yield the highest ROI in their first year of production?

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  •  Buy 200 units of capacity. Finance the $6,800 purchase entirely with a new bond.
  •  Buy 200 units of capacity. Finance the $6,800 purchase entirely with a stock issue.
  •  Buy 100 units of capacity. Finance the $3,400 purchase entirely with a new bond.

 Buy 100 units of capacity. Finance the $3,400 purchase entirely with a stock issue



honeyd


20-04-21 | 21:40:33

Bond has interest thus reduces ROI. Cost of acquiring 100 extra unit is higher compared to the cost of second shift production.
Second shift production=100*7.91=791
Cost of purchasing 100 units=100*34=3400
Bond has interest and thus lowers ROI
The best option is to purchase 100 units capacity at a cost of 3400 and finance through stock

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