Write a memo to the general manager explaining your analysis for the specialty spark plug project.
Include the following information:
Present the NPV and IRR calculated for the purchase of new equipment (Phase 3 task 1).
Explain the effect of a sales volume increase on the total fixed costs, unit fixed costs, total variable cost, and unit variable cost.
Discuss the effect of a volume increase in sales, a price increase in sales, and a cost decrease on the net operating income.
Calculate the payback period for the new equipment project.
Make a recommendation about the manufacture of the specialty spark plug and purchase of new equipment.
...ual to zero. Most of the capital budgeting decisions are taken on the basis of the IRR to know the appropriateness of making investments in a particular project. The cost of capital for the firm is 11%, while the IRR is 19.68%, which is higher. A higher IRR explains the good investment proposition. The MIRR is also higher than the cost of capital, which explains that this project will be helpful to add value for the company.
//After discussing the effect of NPV and IRR, now we will discuss the effect of the increase in the sales volume on the various costs in an organization. I am providing a general overview for it. The effect can be different in the long run and short run in an organization.
Effect of Increase in Sales Volume
The increase in the sales volume causes the change in the total cost of the company. Following are the effects of the volume increase in sales -
· Effect on total fixed cost -The fixed cost doesn't change with the change in the sales volume of an organization; it remains same for all the levels of production. So, the increase in the volume of sales will not affect the total fixed cost in the organization.
· Effect on unit of fixed cost - The total amount of fixed cost doesn't change but the per unit fixed cost changes with the change in the volume of sales. The increase in the sales volume will cause a decrease in per unit of fixed cost. Therefore, now more units will share the total amount of fixed cost.
· Total variable cost - The increase in the sales volume will also cause an increase in the total variable cost. Increase of one unit will cause an increase in the total variable cost with the amount of per unit variable cost.
· Variable cost per unit - The unit variable cost doesn't change with the change in the number of units. Per unit variable cost remains fixed for all the levels of production. The increase in the sales volume will not cause ...