Answer:
Wozac Drug Plant
The Wozac drug plant should be large enough to produce 81,450 units by Year 10.
Explanation:
a) Data and Calculations:
Current demand = 50,000 units
Demand growth = 5% a year
Period of growth = 10 years
Annual operating capacity cost = $0.40 per unit
Variable production cost = $0.20
Selling price = $3
Absolute growth factor in 10 years = 1.629 (1 + 0.05)ⁿ
where n = 10 years
Demand in 10 years will be equal to 81,450 (50,000 * 1.629)
Fixed cost of building = $6x,
where x = 81,450
= $488,700
b) Projected Income Statement for Year 10:
Sales Revenue = $244,350 (81,450 * $3)
Cost of gods 16,290 (81,450 * $0.20)
Gross profit $228,060
Operating cost 32,580 (81,450 * $0.40)
Annual depreciation 48,870 (488,700/10)
Pre-tax Income $146,610