4:20 PM Thu 14 Jan 74% QUESTION3BF1.pdf 1 280 (85) QUESTION 3 Ria Sdn Bhd, is currently considering expanding its business with the launch of a new product. A market survey was recently commissioned to assess the likely demand for the product and this showed that the product has an expected life of five years. The survey costs RM30,000 and this is due for payment in two months' time. On the basis of the survey information as well as interal management accounting information relating to costs, the assistant accountant prepared the following profit forecasts for the product. Year 2 3 and 4 (RM000 (RM900) (RM900) (RM000 Sales 220 180 120 Cost of sales (215) (160) (130) Gross profit 65 60 50 35 Variable overheads (25) (20) (14) (8) Fixed overheads (35) (35) (35) Market survey written off (20) Net profit/(los) (15) (8) These profit forecasts were viewed with disappointment by the directors and there was a general feeling that the new product should not be launched. The Chief Executive pointed out that the product achieved profits in only three years of its five-year life and that over the five- year period as a whole, a net loss was expected. However, before a meeting that had been arranged to decide formally about the future of the product, the following additional information became available. The new product will require the use of an existing machine. This has a written down value of RM90, 000 but could be sold for RM70,000 immediately if the new product is not launched. If the product is launched, it will be sold at the end of the five-year period for RM20,000. Additional working capital of RM80,000 will be required immediately and will be needed over the five-year period. Half of it will be released at the end of the period. The fixed overheads include a figure of RM15,000 per year for depreciation of the machine and RM6,000 per year for the re-allocation of existing overheads of the business. Ignore taxation Required: a) Estimate the incremental cash flows of the product that Ria Sdn Bhd is currently considering to launch. (Il marks) b) Using a cost of capital of 10%, evaluate the possibility of Ria Sdn Bhd to launch the new product using ) net present value and (i) internal rate of return. Provide your recommendation (6 marks) c) Based on the information above, identify and explain the component of opportunity cost in the context of Ria Sdn Bhd (3 marks) d) Identify TWO other ways that would allow Ria Sdn Bhd to use a machine to produce the proposed new product and explain the merit of each method. (5 marks) (Total: 25 marks) 4:20 PM Thu 14 Jan 74% QUESTION3BF1.pdf 1 280 (85) QUESTION 3 Ria Sdn Bhd, is currently considering expanding its business with the launch of a new product. A market survey was recently commissioned to assess the likely demand for the product and this showed that the product has an expected life of five years. The survey costs RM30,000 and this is due for payment in two months' time. On the basis of the survey information as well as interal management accounting information relating to costs, the assistant accountant prepared the following profit forecasts for the product. Year 2 3 and 4 (RM000 (RM900) (RM900) (RM000 Sales 220 180 120 Cost of sales (215) (160) (130) Gross profit 65 60 50 35 Variable overheads (25) (20) (14) (8) Fixed overheads (35) (35) (35) Market survey written off (20) Net profit/(los) (15) (8) These profit forecasts were viewed with disappointment by the directors and there was a general feeling that the new product should not be launched. The Chief Executive pointed out that the product achieved profits in only three years of its five-year life and that over the five- year period as a whole, a net loss was expected. However, before a meeting that had been arranged to decide formally about the future of the product, the following additional information became available. The new product will require the use of an existing machine. This has a written down value of RM90, 000 but could be sold for RM70,000 immediately if the new product is not launched. If the product is launched, it will be sold at the end of the five-year period for RM20,000. Additional working capital of RM80,000 will be required immediately and will be needed over the five-year period. Half of it will be released at the end of the period. The fixed overheads include a figure of RM15,000 per year for depreciation of the machine and RM6,000 per year for the re-allocation of existing overheads of the business. Ignore taxation Required: a) Estimate the incremental cash flows of the product that Ria Sdn Bhd is currently considering to launch. (Il marks) b) Using a cost of capital of 10%, evaluate the possibility of Ria Sdn Bhd to launch the new product using ) net present value and (i) internal rate of return. Provide your recommendation (6 marks) c) Based on the information above, identify and explain the component of opportunity cost in the context of Ria Sdn Bhd (3 marks) d) Identify TWO other ways that would allow Ria Sdn Bhd to use a machine to produce the proposed new product and explain the merit of each method. (5 marks) (Total: 25 marks)