Considering adding hiking backpacks to their product line

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Reference no: EM131864480

Outdoors Plus manufactures sleeping bags, but are considering adding hiking backpacks to their product line. The five-year project would require new equipment valued at $500,000. The equipment will be depreciated on a straight-line basis to zero over the life of the project, and will be salvaged for $50,000 at the end of the project. The project will also require an investment in inventory of $30,000, will increase accounts payable by $40,000 and increase accounts receivable by $20,000. All net working capital will be recovered at the end of the project. Outdoors Plus expects to sell 10,000 backpacks per year at $100 each. The variable cost of backpacks will be $70. Last year, Outdoors Plus sold 7,000 sleeping bags at $75. The new equipment will reduce the variable cost of sleeping bags from $45 to $35. As part of this project, Outdoors Plus plans to lower the price of sleeping bags to $70 and expects sales to increase to 12,000. The project will also reduce fixed production costs by $1,000 annually.

Calculate the incremental revenue (sales – costs) generated by the project.

Reference no: EM131864480

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