Currently, you are trying to host a summer event for your staff and clients and you were thinking of selling customized wristbands for fundraising. You already bought a light-duty wristband-maker that can produce a maximum of 12,000 units each year. You expect to use the machine for the next 5 years and then sell it for its salvage value of $2,000. According to the manufacturer, you will have an annual variable cost of $1.60 per wristband and a fixed production cost of $14,250 per year. The CCA rate for this asset is 25%, corporate tax rate is 38% and appropriate discount rate is 11%. The manufacturer gave you a 10% discount on a brand new SWB45 Wristband Maker with a suggested retail price of $18,750. The SWB45 will cost you another $700 to install and you also need to lower your net working capital by $5,000. You plan to recapture the net working capital by the end of 5 years. For this event, at what price should you set the minimum selling (bid) price per wristband?
To determine the minimum selling price per wristband, we need to consider the costs associated with producing and selling the wristbands.
First, let's calculate the annual cost of producing the wristbands using the light-duty wristband-maker:
Annual variable cost per wristband = $1.60
Number of wristbands produced per year = 12,000
Total variable cost per year = Annual variable cost per wristband * Number of wristbands produced per year
Next, we'll calculate the annual fixed cost of production:
Annual fixed production cost = $14,250
Now, let's calculate the total annual cost of production:
Total annual cost of production = Total variable cost per year + Annual fixed production cost
To determine the total cost over the 5-year period, we need to account for the salvage value of the machine at the end of 5 years:
Salvage value = $2,000
Next, let's calculate the initial cost of purchasing and installing the SWB45 wristband maker:
Initial cost of SWB45 wristband maker = (Suggested retail price - Discount) + Installation cost
Net working capital = $5,000
Now, let's calculate the tax shield benefit from the Capital Cost Allowance (CCA) tax deduction:
CCA rate = 25%
Corporate tax rate = 38%
Tax shield benefit from CCA deduction = (Initial cost of SWB45 wristband maker + Installation cost - Salvage value) * CCA rate * Corporate tax rate
The next step is to calculate the present value of the total cost over the 5-year period:
Discount rate = 11%
Present value factor (PVF) = (1 + Discount rate)^n, where n is the number of years
Present value of total cost = Total annual cost of production * PVF + Tax shield benefit from CCA deduction
Finally, let's calculate the minimum selling price per wristband by dividing the present value of total cost over 5 years by the number of wristbands produced per year:
Minimum selling price per wristband = (Present value of total cost / Number of wristbands produced per year)
By following these steps and crunching the numbers, you'll be able to determine the minimum selling (bid) price per wristband for your summer event.