Hi-Tech Legacy Ltd manufactures and sells tablet computers. Over the last few years, the company has been manufacturing and selling tablets with handwriting pen input. The tablets are called Squiggle-Tab. The costs incurred to manufacture and sell one Squiggle-Tab are given below:

Hi-Tech Legacy Ltd had invested £1,590,000 to manufacture and sell 15,000 Squiggle-Tabs each month. The investment amount includes funds incurred on the purchase of equipment and funds needed to carry inventories and trade receivables. The company requires a 20% return on investment. Recently, the company conducted a market research survey to gather data about existing and potential customers of Squiggle-Tab and to identify the potential risks involved. The survey results suggested that Squiggle-Tab will become obsolete in another two to three years because of further advances in the technology. To meet the advancements in technology, Hi-Tech Legacy Ltd is considering a couple of investment options. One of the investment ideas is to convert the existing tablet computers into mini-tablet computers called Teeny Squiggle-Tab. Teeny Squiggle-Tabs will be smaller in size and will have an upgraded operating system. The research and development division of the company has designed Teeny Squiggle-Tabs and has tested the product within the company. The company plans to manufacture and sell Teeny Squiggle-Tabs from the beginning of next month. The estimated costs to manufacture and sell one Teeny Squiggle-Tab are given below:

The management of Hi-Tech Legacy Ltd has estimated an additional investment of £4,410,000 to launch Teeny Squiggle-Tabs. Teeny Squiggle-Tab is a redesigned version of Squiggle-Tab, and the investment amount of £4,410,000 is in addition to the investment amount already incurred for Squiggle-Tab. The company is expecting to sell 30,000 Teeny Squiggle-Tabs in one month. The desired return on investment is 20%. Apart from manufacturing and selling Teeny Squiggle-Tabs, Hi-Tech Legacy wants to introduce smart phone with advanced features. The research and development division of the company has already designed the product, and the company has named the smart phone Squigglet. The company is planning to launch Squigglet based on the market response to Teeny Squiggle-Tabs. The estimated costs to manufacture and sell one Squigglet are given below:

The management of Hi-Tech Legacy Ltd has estimated that an investment of £3,250,000 is required to set up the smart phone division. The investment amount includes the amount spent on research and development. The company is expecting to sell 20,000 Squigglets in one month. The desired return on investment is 20%.

Required
1. Calculate the unit product cost of Squiggle-Tab, Teeny Squiggle-Tab and Squigglet. Assume the number of units sold in a month is equal to the estimated units.
2. Based on the absorption costing approach, calculate the target selling price of one Teeny Squiggle-Tab.
3. Based on the absorption costing approach, calculate the target selling price of Squigglet.
4. Assume Hi-Tech Legacy Ltd sells 30,000 redesigned Teeny Squiggle-Tabs in a month. Calculate the net operating profit arising from the sale of Teeny Squiggle-Tabs.
5. Assume Hi-Tech Legacy Ltd could sell only 20,000 Teeny Squiggle-Tabs in a month. Calculate the return on investment.
6. Assume Hi-Tech Legacy Ltd sold 25,000 Squigglets in a month instead of the estimated 20,000 Squigglets. Calculate the return on investment from Squigglets in the month.
7. Suppose Hi-Tech Legacy Ltd does not estimate the cost required to redesign the existing tablets into minitablets. Instead, it asks its marketing department to conduct research and estimate the price that the target customer will be willing to pay if the tablet is redesigned. The marketing department finds that the target customers will be willing to pay £160 if the tablet is redesigned. Based on this approach, what is the target cost per redesigned tablet (Teeny Squiggle-Tab)?
8. Hi-Tech Legacy Ltd has redesigned the existing tablet and made it a mini-tablet. The company has also increased the price of the redesigned tablet. If the increase in price of the tablet substantially reduces the number of tablets sold by Hi-Tech Legacy Ltd, determine the price elasticity of demand.

Transcribed Image Text:

Direct material Direct labour Variable manufacturing overhead Fixed manufacturing overhead Variable selling, general and administrative expenses Fixed selling, general and administrative expenses Cost per Squiggle-Tab £22 £20 £6 £8 Total £450,000 £300,000