Riverside Packaging Case Solution

Assumptions and Calculations

Under the emergency assist contract, General Motors needs the packaging of Fascias for 18 months. General Motors will pay $ 5.5 per unit for labor while $ 8 per unit for materials. The expected sales volume is expected to be 4,500. The expected sales volume has been assumed to grow at a reasonable rate of 10% based on the growth in the number of SUVs in prior years. Finally, the facility will be operating for 250 days per year. The revenue for the first year will be $ 15.187 million.

In order to undertake the contract, Riverside Packaging would need to lease the entire packaging facility, i.e. 650,000 square feet in size, in Michigan. The minimum life of the lease agreement will be three years. The annual rental payable for the facility will be $ 6 per square foot.

Moreover, in addition to the facility, Riverside Packaging would have to purchase 35 lift trucks. A Canadian supplier has quoted Cdn$ 45,000 per truck which has been assumed to be the cost of acquisition per truck. Using the exchange rate of 0.645771 USS$/Cdn$, the cost per truck comes out to be US$ 29,060, hence, a total cost of 1.017 million for 35 trucks. Also, additional shelving and racking would cost $ 800,000 while packaging equipment will cost $ 225,000. Also, Riverside Packaging would also need to purchase some computers and office equipment that will cost $ 140,000. Consequently, the total initial investment required for the contract is $ 2.182 million.

All of the initial investment will be capitalized and depreciated over the useful life of the capital assets. The useful life of lift trucks is expected to be seven (7) years, and the cost of 35 trucks will be depreciated using a straight-line method of depreciation. Similarly, shelving and racking and packaging equipment will be depreciated over a useful life of 10 years. Finally, office equipment will be depreciated via the double-declining method for over five years.

The cost of packaging materials per unit of fascia is assumed to be $ 7.6 while the shipping cost is assumed to be $ 1. Moreover, other operating costs such as heat, utilities, maintenance and property taxes are assumed to be $ 1,000,000 annually. Furthermore, Riverside Packaging would also need to hire new staff comprising of 60 packagers and 40 material handlers. The hourly wage of packagers is $ 8.5 per hour whereas the hourly wage of material handlers is taken as $ 10 per hour. The new staff would be required to work 8 hours a day. In addition to the operating days, the workers would need one week of training. Therefore, seven (7) days of wages have been taken as a training costs of the new workers.

It is important to note that the contract with General Motors is only for 18 months. However, the term of the lease of the facility is three years. The salvage value of the project is assumed to be $ 1.6 million. Kevin Howe expects that the contract will be renewed after 18 months;