Alagie Darboe Problem 5:

American Fruit Co. is considering constructing a new plant to process frozen fruit juice. One plant would be capital intensive, the other much more labor intensive. Although the final decision would hinge on the relative cost of capital versus labor in the northern California area, management is curious about the behavior of the plants return on assets during a typical business cycle.
Plant 1 $ $ $ $ Plant 2 $ $ $ $

Fixed Cost Variable Cost (per unit) Price (per unit) Investment

200,000.00 1.50 2.00 1,000,000.00

600,000.00 0.50 2.00 1,000,000.00

a) Given the following information, calculate the break-even point in units of production for the two plants Answer:
Break-even point in units for Plant 1 Break-even point in units for Plant 2 400000.00 Units 400000.00 Units

b)The economics department has prepared sales projections for three business scenarios:

recession, normal, and recovery. Sales under each scenario are expected to be as follows: recession, 300,000 units; normal, 500,000 units; and recovery, 800,000 units. Calculate the return on assets for the two plants under these three scenarios. Answer: Scenario Units ROA c)
Recession Normal Recovery Variance -0.1167 -0.0167 0.1333 Probabilty 0.013611 0.33 0.000278 0.33 0.017778 0.33

Recession 300,000 -5%

Normal 500,000 5%

Recovery 800,000 20%

Standard Deviation

Average ROA 0.0667

0.00454 9.3E-05 0.00593 0.010556 1.0556% 0.1027402 10.2740%