On the Issue of Using Energy Bar’s Excess Capacity for Producing Energy Gel, Do You Agree with Mr. Wickler or Mr. Leiter? Why?

                                        Energy Gel (A)

                                Suggested study questions

1. On the issue of using Energy bar’s excess capacity for producing Energy Gel, do you agree with Mr. Wickler or Mr. Leiter? Why?

Each project should be evaluated individually  meaning using its own capital, machinery , facilities and etc.  Since when you are selecting a project among different other projects, you want to know how much each projects requires and what is its payback period. That why when we analyzed Energy Gel project , we totally agree with Mr.Leiter since he requires to evaluate project on full cost basis rather than Mr.Wicklers direct cost basis.

Mr.Leiter has a full right to say that since , why should he pay for other project’s expenses and let them depreciate his machines. The equipment was designed and purchased for Leiter’s department, that’s why; energy gel project should not have a free ride on the equipment utilized by both projects. By augmenting the utilization of the equipment that depreciating the capacity of the equipment at a faster finally decreasing the long term

from Leiter’s group.

1. Who do you agree with on the issue of cannibalization of Energy bar sales? Ignore the cannibalization issue in constructing the cashflows

Moreover introduction of a new product would decrease  the sales of Energy Bars. Cannibalization is inevitable in this case because who would prefer a snack which takes long time to digest and should be taken before the physical activity.

Cannibalization is the prevalent factor that new product line advertised in the market with decrease in units and sale of present product that has growth potential. Mr.Leiter knows that. He assumes by introduction of Energy Gel into market it will eat Energy Bars portion of cake by 10% annually. Which in his place decreases contribution margin and profit.

Total units of 66 million will be produced and without erosion the unit sale will be $39 million; it will grow at 10% in 2001 and 2002, 9% in 2003, and it will grow by 8% in 2004 to 2010. Energy bar units will reduce in 2001 and 2002 by 10% rate, 9% in 2003 and it will reduce 8% from 2004 to 2010. Through this cannibalization utilization of energy bar plant will decrease by 1% in year 2001 and later on it will increase by 65% in 2002, 71% in 2003 77% in 2004 and it will be over utilize by 104% in 2008, by 113% in 2009 and 122% in 2010. This over utilization capacity will decrease the long-term growth of energy bar by 3 million units in 2008, 9 million units in 2009 and 15 million units in 2010. Through this cannibalization the capacity available to produce Energy Gel project will be 54.12 million units in 2001 and in year 2010 it will reduce the production capacity by 29 million units.

1. In Valuing Energy Gel, does Wickler have to consider costs for overhead?

Based on assumptions given in word document we prepared a chart below. We took the same growth rates in sales given in Exhibit 5 and applied them to this chart. But because our Sales changed from 6,3 to 6,46 all our sales changed .