Coco Mix Essay examples

Submitted By Robert-Paredes
Words: 1803
Pages: 8

CocoMix Juices©
Copyright © 2012 by Dr. Gabriel G. Ramírez

FIN 4220
Bebidas-Sabrosas (B-S) Inc. is a producer and distributor of juice drinks. Currently, B-S has one line of tropical juices targeted to Hispanic communities in Chicago, LA, Miami, and
New York. Two years ago, the firm decided to expand its operations and create a juice drink from Costa Rican green coconuts, or “pipas” (see Exhibit 1). The liquid inside pipas is clear, as opposed to the milky color in mature coconut. In Costa Rica as well as in many other countries, the popular pipa is served simply chilled with the shell opened so the customer can drink the liquid inside. During these past two years, the firm engaged in research and development and conducted test marketing in Dallas at a cost of $800,000. The results of the test market were very encouraging and B-S has decided to launch a product to its current market and to expand to
Texas. The name of the new juice will be CocoMix. Exhibit 2 provides an earlier version of the prototype for the product that was called CocoCasa. The plan is to keep most of the design for
The applicable tax rate is 40% and the Comptroller has determined that the appropriate discounting rate for this type of project is 10%.
The production process for CocoMix is very specialized but some production elements are similar to the ones used for existing drinks and thus both products will share some of the same equipment. The production process will be housed in an area not currently used by B-S.
However, it is estimated that more distribution trucks will be necessary for a cost of $1.0 million and necessary new equipment will cost $0.8 million. These investments qualify for a Investment
Tax Credit (ITC) of $10,000 which the firm can choose to take it all at once in year zero or distribute it equally over the life of the project. These are the only new investments in fixed assets required during the life of the project. The project is expected to last 10 years at which time it will be shot down. All investments in short- and long-term assets will be liquidated and the proceeds will be received (recorded) in year 11. Investments in working capital will be recovered at cost. It is estimated that the trucks could be sold for $200,000 and the equipment for $120,000. The depreciation method to use is the MACRS under which the trucks qualify as a
5-year property and the equipment as a 7-year property (Table 7.4 in “Chapter 7: Making
Investment Decisions with the NPV rule” (chapter page 152) presents the respective percentage to use for MACRS). There are also start-up costs (expenses) in the amount of $50,000 during the first year of operations.
Cost of good sold has two components: (1) a fixed component as presented in table A below and reflects salaries (does not include depreciation) and a variable component. The variable part of cost of goods sold (CGS) is estimated to 30% of sales in each year. In addition, the company will incur in Selling and Administration (S&A) expenses. S&A includes advertising, promotions, sales and distributor salaries, and other direct personnel salaries and S&A also has to

components: (1) a fixed part and (2) a variable part (% of sales) both as indicated in table A below. Sales for next year will be $4 million. Working capital needs will vary with sales in the manner described below.
The marketing department has been able to determine what portion of S&A expenses is variable and related to the level of sales. Because this is a new product, significant advertising and promotional efforts will be required during the first two years of introduction and thus the estimates for S&G for the first two years are for $3 million a year and drop to $1.5 million in years 3 and 4 and then to a $1 million a year for the duration of the project. The first two years only have a fixed component. As the product gets moving, most of the S&A expenses will be