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A customer has offered to purchase 1500 office chairs for each of the next three years (equating to 3000chairs in total) from Isu Enterprises. The
A customer has offered to purchase 1500 office chairs for each of the next three years (equating to 3000chairs in total) from Isu Enterprises. The customer's offer is dependent on Isu Enterprises being willing to: i. customise the chairs with the customer's logo which would require the business to purchase a special machine to imprint the logo at a cost of $18400. The machine is specialised and would have no alternative use and therefore no scrap value. The machine's useful life would be the three year production run. ii. ii. accept a discounted selling price of 40% less than the chairs' normal selling price. Isu Enterprises' standard bulk order office chair selling price is $100 per chair. The normal budgeted office chair manufacturing costs are as follows: Variable Costs Direct Materials Direct Labour Manufacturing Overhead Selling and Administration $ per chaire 35e 8e 22 2.5e Fixed Costs Manufacturing Overhead Selling and Administration $e 100,000 40,000 Variable Selling and Administration expenses would be $0.50 less per chair on the customised order. WA Isu Enterprises' normal budgeted fixed costs would be unchanged by the customised chair order. Depreciation on the specialist logo machine would be calculated on the straight-line basis. Isu Enterprises is taxed at the company tax rate of 28% The opportunity cost of capital is 10% Required: a. Calculate the Net Present Value of the customer's offer to Isu Enterprises Ltd. You are required to show all your working. Finance formulas are provided on the following page for your reference. b. Assuming Isu Enterprises does not have enough capacity to produce the special order without decreasing the production of its standard office chairs by 300 per year over the period. Calculate the Net Present Value of the production lost, if the expected operating cash flow for 300 office chairs is $11,370. C. Assuming Isu Enterprises does not have enough capacity to produce the special order without decreasing the production of its standard office chairs by 300 per year, should Isu Enterprises accept the customer's offer? Your answer should refer to the following considerations: i. Net Present Value ii. Opportunity Cost iii. Non-financial factors that should also be considered when making the decision.' A customer has offered to purchase 1500 office chairs for each of the next three years (equating to 3000chairs in total) from Isu Enterprises. The customer's offer is dependent on Isu Enterprises being willing to: i. customise the chairs with the customer's logo which would require the business to purchase a special machine to imprint the logo at a cost of $18400. The machine is specialised and would have no alternative use and therefore no scrap value. The machine's useful life would be the three year production run. ii. ii. accept a discounted selling price of 40% less than the chairs' normal selling price. Isu Enterprises' standard bulk order office chair selling price is $100 per chair. The normal budgeted office chair manufacturing costs are as follows: Variable Costs Direct Materials Direct Labour Manufacturing Overhead Selling and Administration $ per chaire 35e 8e 22 2.5e Fixed Costs Manufacturing Overhead Selling and Administration $e 100,000 40,000 Variable Selling and Administration expenses would be $0.50 less per chair on the customised order. WA Isu Enterprises' normal budgeted fixed costs would be unchanged by the customised chair order. Depreciation on the specialist logo machine would be calculated on the straight-line basis. Isu Enterprises is taxed at the company tax rate of 28% The opportunity cost of capital is 10% Required: a. Calculate the Net Present Value of the customer's offer to Isu Enterprises Ltd. You are required to show all your working. Finance formulas are provided on the following page for your reference. b. Assuming Isu Enterprises does not have enough capacity to produce the special order without decreasing the production of its standard office chairs by 300 per year over the period. Calculate the Net Present Value of the production lost, if the expected operating cash flow for 300 office chairs is $11,370. C. Assuming Isu Enterprises does not have enough capacity to produce the special order without decreasing the production of its standard office chairs by 300 per year, should Isu Enterprises accept the customer's offer? Your answer should refer to the following considerations: i. Net Present Value ii. Opportunity Cost iii. Non-financial factors that should also be considered when making the decision
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