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Eternal Faucets Limited

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Issue

Although all planning and financial projections for fiscal 2015 had been prepared, the president of Eternal Faucet Limited had just informed Greg Lawrence, chair of Eternal Faucet Limited’s planning committee, of an opportunity to purchase several new production machines. If purchased, this equipment would decrease specific manufacturing costs by ten per cent as well as require the implementation of some new production methods in the current manufacturing process. Regardless of the industry outlook for faucet sales, Lawrence knew that swings in the industry, due to its volatility, could change quickly, rendering the company unable to accurately predict annual sales; consequently, Eternal could be vulnerable to as much as a twenty per cent reduction in its annual sales volumes. Lawrence must evaluate this purchase opportunity and then present his recommendation(s) to the company’s president in one week’s time.

Teaching Objectives

Students are introduced to business analytical tools, including contribution analysis and break-even analysis, to help them assess the costs and benefits associated with this purchase decision. Students will also learn how to identify variable costs, fixed costs, and one-time investments and the relevancy of allocated fixed costs when making this kind of a decision. Using their analysis, students can then assess the trade-offs associated with this opportunity to aid in their decision.

Analysis Required

Identification of costs (variable, fixed, one-time investments), contribution analysis, break-even analysis, capacity levels, vertical ratio analysis, return on investment and payback calculations, and efficiency trade-offs (cost-benefit analysis).

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Tags: Accounting (Managerial)