Solved: Two new alternatives have come up for expanding

Grandmother s Ch

Two new alternatives have come up for expanding Grandmother’s Chicken Restaurant (see
Solved Problem 2). They involve more automation in the kitchen and feature a special cooking
process that retains the original-recipe taste of the chicken. Although the process is more capital
intensive, it would drive down labor costs, so the pretax profit for all sales (not just the sales
from the capacity added) would go up from 20 to 22 percent. This gain would increase the
pretax profit by2 percent of each sales dollar through $800000 (80.000 meals x $10) and by 22
percent of each sales dollar between $800,000 and the new capacity limit. Otherwise, the new
alternatives are much the same as those in Example 6.2 and Solved Problem 2.
• Alternative 1: Expand both the kitchen and the dining area now (at the end of year 0), raising
the capacity to 130,000 meals per year. The cost of construction, including the new automation,
would be $336,000 (rather than the earlier $200,000).
Alternative 2: Expand only the kitchen now, raising its capacity to 105,000 meals per year. At
the end of year 3, expand both the kitchen and the dining area to the 130,000 meals-per-year
volume, Construction and equipment Costs would be $424,000, with $220,000 at the end of
year c) and the remainder at the end of year 3. As with alternative 1, the contribution margin
would go up to 22 percent.
With both new alternatives, the salvage value would be negligible. Compare the cash flows of all
alternatives. Should Grandmother’s Chicken Restaurant expand with the new or the old
technology? Should it expand now or later?

ANSWER
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