After doing some research, P. Nutt discovered that there is a new “continuous” peanut roasting machine available for $150,000.00. The machine has an output of up to 2500 lbs per hour. Output and quality are controlled by both temperature controls and belt processing speed. The machine is 80′ long X 6′ wide and the current building has the room to accommodate this size of machine without problem. P. Nutt can finance the purchase of the machine over a 5-year period for a blended cost (principal and interest) of $2,895.00 per month. The current fixed costs to run the business is $18,500.00 annually. Current annual variable cost is $60,000.00, primarily for labour. Mr. Nutt estimates that if he buys the roaster, his fixed costs (including the bank loan to pay for the machine) will increase by $8,000.00 per month. He also has calculated that his labour costs will increase in relationship to the increased production volume by up to $70,000.00 per year above the current labor expense.
Mr. Nutt, believes that within 6 months of the new machine being operational, he should have the volume to be able to process 4,000 lbs per week, after 36 months 15,000 lbs per week, and after 48 months 20,000 lbs per week. These numbers include the current volume
P. Nutt would be able to buy the peanuts in 2,000 lb size totes and once his volume is large enough, he would be able to bring in up to 48,000 lbs of raw peanuts on a single trailer. The savings per pound by buying direct from the growers instead of through his current distributor would be approximately .40 cents per pound (lb). That would reduce his current cost for raw peanuts to $1.00 per lb from the current $1.40 per lb. In order to justify buying direct, P. Nutt will have to bring in a minimum of 5 totes (10,000 lbs) at a time. Shelf life on the raw peanuts is several months, providing they are stored in a temperature-controlled environment.
1.Draw the decision tree for purchasing the Peanut Roasting Machine. If Mr. Nutt does not invest in the machine, does he need to worry about the different demand scenarios? Why or why not?