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An internet caf is considering investing in a new photocopying machine to maximize its productive capacity for photocopying documents. The purchase price of the new

An internet caf is considering investing in a new photocopying machine to maximize its productive capacity for photocopying documents. The purchase price of the new machine is $ 673,800 which will have an economic life of five years. There is installation and commissioning cost of $47,000 and $28,000 respectively. It is estimated that a market exists for 42,500 bottles of sugar wax locally per annum.
Each bottle of sugar wax will be sold for $160 and will cost $90 to produce. A previous market research has indicated that the small business could gain 15% of the market in the first three years and 10% in the final two years.
Other relevant information are as follows:
Variable distribution cost of $8 each
Annual promotion cost of 2% of sales revenue
Use the straight-line method for depreciation. There is a scrap value of $10,000.
The required rate of return on debt is 20% and return on equity is 14%
Currently the assets of the company are funded by 70% debt and 30% equity
Corporation tax rate is 30%.
*** Depreciation is an allowable deduction for tax purposes.
Required:
(a) The annual operating income after tax and the operating cash flows of the project and the net present value (NPV).
(30 marks)
(b) Internal Rate of Return and Profitability index of the project.
(8 marks)
(c) A Recommendation to the management team to accept or reject the project. (2 marks)
Question #2(20 marks)
A company operates using a standard marginal costing system and manufactures one product and management is trying to assess its operations. Standard revenue and cost data is provided for Cinco.
Selling price ,$48.00
Direct material A,2.5kg at $6.80 per kg
Direct material B ,1.5kg at $4.80 per kg
Direct labour ,0.45 hrs. at $24.00 per hour
Actual data for the twelve-month period was as follows:
Sales and production 48,000 units of the blaster were produced and sold for $2,323,200
Direct material A ,121,950kg were used at a cost of $804,870
Direct material B ,67,200kg were used at a cost of $336,000
Direct labour Employees worked for 18,900 hours, but 19,200 hours were paid at a cost of $468,480
Budgeted sales for the period were 50,000 units of Product Blaster. A recession last year meant that the market for the product declined by 10%.
Required:
(a) Calculate the following variances.
(i) Sales volume variance.
(2 marks)
(ii) Planning and operational variances for sales volume.
(4 marks)
(iii) Price, mix and yield variances for each material.
(10 marks)
(b) Suggest two possible explanations for the material price and yield variances calculated in part (a).
(4 marks)
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