Adamac Inc.

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An Analysis of Production and Cost Theory

Group III
Osvald Ronald David Tjahjo

• • • • Company’s Overview Current Issues Case Analysis Recommendation


Overview of Adamac Inc. 
• Provide services of jet cutting (laser, water jet,  wire) built by Ryan Olliver and Ben Watts,  previously worked for Perts • Adamac was built with an objective to provide  more efficient and higher customer service • Adamac had started with used water jet, used  laser cut machine, and wire cutter machine


Partnership and Organization
• Ryan Olliver and Ben Watts were the key  players on the company with Mike Degena act  as landlord and became the third person on  the partnership • Currently Adamac employed 8 people – Olliver and Watts, Jennifer (Olliver’s wife), with  one programmer and four machine operators


Success Factors
• Adamac was well known of their exceptional  customer service and high‐quality work • The company compete on service and charged  “premium price with premium product” • Major clients is manufacturing industry but  also can be agriculture, finance, and sales


Current Issues
• The company had 70 clients and reached its  maximum capacity  – They were experienced with machine  malfunctions of 8 days – No profit on laser cutter sales and had to be  outsourced from to other company that very  expensive


Expansion Alternatives
Alternatives Buy neither (no expansion) Buy a laser jet cutter only Buy a laser jet cutter and a  water jet cutter Option 3 plus buy out Degena (shares and land) Conditions No loans and workers are  required Loans and additional workers  required Loans and additional workers  required Loans and additional workers  required


Investment and Loan Information
• Investing and loan information provided to  Adamac by the bank Purchase jet cutter Laser cutter (used) Water cutter (used) Loan Loan period Loan period DP Monthly principal payment Monthly interest Additional land square required 10,000 sq feet land $ Moving costs Purchase price $ 500,000 200,000 % contr of revenue 55% 40% Amortization Salvage value Depreciable Depreciation/y (yrs) r 10 $ 35,000 $ 465,000 $ 46,500 10 $ 10,000 $ 190,000 $ 19,000 % of usage 1st yr 55% 40% % of usage 2nd yr 55% 40%

4 years 192 months 10% of total loan 2,604 8%

Additional workers (required either one or two machines purchased) 1 operator $ 48,000 $24 per hour for 40 hrs per week (50 weeks/yr) 1 programmer 50,000

120,000 $1/sq foot per mo 50,000

Operating Expenses Ops Exps $ 42,079 Ops Exps 504,948.00

(monthly) (yearly)

Revenue As May 2008




• Future gross revenue and costs were forecasted using  Smoothing Average (3 years) method • Maximum Payout Period would be 10 years (machines/asset  lifetime) – Using straight line depreciation method with different salvage values  between used laser and water cutter

• Loans would be required from the bank for new machine  purchases and buyout Degena’s share • Incremental (additional) revenue and costs were calculated  from percentage the new machines could brought to the  business (i.e. laser jet will be 40 – 55%) • Share of Mike Degena is assumed to be 33.3% of total  company assets – Buyout will require monthly payment of 2 years (calculated at 33.3%  portion to be paid to Degena from gross revenue) 9

Decision Making Analysis
• Using approach of NPV, IRR, and Payout  Period to compare between alternatives • Decide the best alternative can be based on  faster Payout Period and/or NPV amount


Alternative 1: No Expansion
Descriptions Revenue Cost of Goods Sold Gross Profit Expenses Management salaries Wages and benefits Amortization Repairs and maintenance Rent Loan interest Factory supplies Auto expenses Legal fees Utilities Telephone Insurance Miscellaneous Travel and entertainment Delivery charges Office supplies Computer software expense Garbage service Advertising and promotion...
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