Answer Happy

Anderson & Smith Plc, A&S Plc, is a company in the food
processing industry. The company has gone from doing the
traditional stuff like frozen pizza and burgers to offerings that
resemble traditional home-cooked food like stews, soups, and
various vegetarian dishes. Since about 10 years back the sourcing
of ingredients comes from farms within a parameter of 40 miles from
the processing plant. The production process is geared to limit
waste and at the moment roughly 90% of all ingredients end up as
sellable items. What is not used is recycled and sold back to
suppliers as animal food or soil enhancement. An issue is that a
product sold under the name "Grandmas Beef and Carrot Stew" has a
waste of 22% and is a major headache for management as it is not
only costly but might pose a potential marketing challenge if known
by investors and the public. The operation is smooth but has its
challenges as the consumption of energy using current machinery is
high and the energy prices on the market is sky rocketing due to
the transition from nucellar and fossil based to wind and solar
based production of electricity. A&S Plc is a family business
even if roughly 25% of its shares are listed on the stock exchange
in London. Since a few years back the chairman is Arnold Smith and
the CEO is Lucy Andersson. Lucy has recently hired John Gromwell as
her CFO, Chief Financial Officer. Even if A&S is a successful
company with a good reputation there are challenges ahead that you
will encounter as you are presented with a number of issues John
and Lucy need to attend to. From time to time Arnold interferes in
their day-to-day life and he is a rather demanding figure.
It is indeed a lovely setting and after a month in office not
much had occurred. However, this was going to be a different day.
An SMS came in and it was Lucy who demanded his presence in her
office. Lucy did not waste much time and went straight into the
topic, Grandma's Beef and Carrot Stew. Lucy started; "I met with
Harold Brown yesterday and we discussed how to reduce the waste and
he delivered a rather intriguing proposal but it is a challenge
that requires your full attention". Harold is the Operations
Manager and also in charge of the laboratory. The thought process
is as follows; If we invest in a new process we can get the waste
down from 22,2% to 12,5%. However, it demands a new cutting machine
and also an upgrade to our conveyor belt. In total, the investment
amounts to £195 000 and we can sell the current machinery for £20
000 to a competitor. As waste is reduced direct labor will be
reduced but we need to hire a quality engineer to ensure proper
calibration of the new set-up and that will increase the overhead.
Can you please handle this Lucy said and use a rate of return of
15%. Let us assume the economic life of this investment is 5 years.
The yearly volume is 200 000 units. John spent the rest of the day
with Harold and his team and came up with the new cost structure
that is presented below. Until this point, John was comfortable but
was in need of some help to finish off the analysis that Lucy was
expecting. Please make the required analyze and deliver your view
of whether the idea is viable or not.
Old GBCS New GBCS Sales Price 4.00 € 4.00 Ingredients - 1.75 - 1.75 Waste 0.50 € 0.25 Labour 0.15 € 0.10 Overhead - 0.10E 0.12 Depreciation - 0.30 - 0.35 Profit 1.20 £ 1.43 ff f f f ff