Call Now: (+61) 416-195-006
Memorandum
To: DuoLever CEO
From:
CC:
Dated: 19th May, 2019
Subject: Evaluation of Production Option and Outsource Option
DuoLever has found a new and efficient method for recycling sachet waste that has negative environmental impact and is adding up in world production of plastic. This recycling method is efficient and will save energy usage by upto 83%. The major issue being faced by DuoLever is to decide whether to add production of recycled sachet plastic to company’s portfolio or license the use of its patented method to Clean World Ltd. This memo is presented with evaluation of both options using Net Present Value budgeting method.
In response to the environmental impact of plastic ending up in landfills, oceans and rivers, DuoLever has found an efficient way of recycled sachet plastic production. In order to produce the soft plastic, DuoLever has two options, the first one requires it to invest into machinery that could produce the recycled plastic sachets while the second option allows it to partner up with Clean World Ltd. and allow it to produce sachets for DuoLever. The table below shows the income statement of DuoLever when none of the options are taken on board based on the following data:
- Sales revenue will grow at 4% per year after first year sales of $200 million.
- Variable cost will grow at 3% per year after first year cost of $22 million.
- Selling and administration cost will be $1 million throughout 5 years.
- Tax rate is 25%
The forecasted income statement is as follows:
| BASIC INCOME STATEMENT OF DUOLEVER | |||||
| Year 1 | Year 2 | Year 3 | Year 4 | Year 5 | |
| Sales Revenue | 200.00 | 208.00 | 216.32 | 224.97 | 233.97 |
| Variable Cost | (22.00) | (22.66) | (23.34) | (24.04) | (24.76) |
| Selling and Administration Cost | (1.00) | (1.00) | (1.00) | (1.00) | (1.00) |
| Income Before Tax | 177.00 | 184.34 | 191.98 | 199.93 | 208.21 |
| Tax | (44.25) | (46.09) | (48.00) | (49.98) | (52.05) |
| Net Profit | 132.75 | 138.26 | 143.99 | 149.95 | 156.16 |
Discussion
The above analysis shows an increasing net profit for DuoLever Ltd. in case it doesn’t choose any of the options.
Income Statement in Option 1:
| INCOME STATEMENT FOR OPTION 1 | |||||
| Year 1 | Year 2 | Year 3 | Year 4 | Year 5 | |
| Sales Revenue | 204.00 | 212.16 | 220.65 | 229.47 | 238.65 |
| Variable Cost | (18.70) | (19.26) | (19.84) | (20.43) | (21.05) |
| Cash Operating Expenses | (3.00) | (3.00) | (3.00) | (3.00) | (3.00) |
| Depreciation | (4.00) | (4.00) | (4.00) | (4.00) | (4.00) |
| Lease Payments | (1.40) | (1.40) | (1.40) | (1.40) | (1.40) |
| Operating Income Before Tax | 176.90 | 184.50 | 192.41 | 200.64 | 209.20 |
| Taxes on Operating Income | (44.23) | (46.12) | (48.10) | (50.16) | (52.30) |
| After Tax Operating Income | 132.68 | 138.37 | 144.31 | 150.48 | 156.90 |
The above analysis is done using following data:
- Sales will further grow at 2%
- Variable cost will reduce by 15%
- Lease payments of $1.4 million annually will be made on loan used for funding purposes.
- Selling and administration cost will rise by $2 million annually
- Depreciation will be 20% on straight-line basis on $20 million cost
- Tax rate will be 25% and discount rate will be 8%
Chat with our Experts
Want to contact us directly? No Problem. We are always here for you
