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NUMBER FOUR Chileni Company Limited (CCL) recently sent their chief designer to the USA and UK to review developments in the American and British Markets. He has now returned with details of a new type of food mixer that is being developed over there. CCL are considering the design and manufacture of a liquidizer gadget attachment to be used as an extra gadget for the new mixer when it is sold in Kenya. The chiefdesigner's notes show that 10% of the experts he questioned in both the UK and USA believed the new mixer would reach the Kenyan market in a year's time, whereas 30% thought it would be launched in four year's time, and the remainder suggested a five-year delay before it reached Kenyan. The presents value (PV) of net cash flows form making and selling the liquidizer are estimated by the company to be sh.8 million, if the market develops one year from now and sh.3.2 million if it develops five years from now. CCI have not developed a liquidizer before, and whilst it immediate development would cost Sh.2 million, they feel they have only a 50% chance of a successful development at present. A number of alternative courses of action present themselves. The company could abandon the whole project, or wait for one year to see if the mixer has penetrated the Kenyan market. They would then abandon or develop the liquidizer at a PV cost of Sh.1.8 million, with a 70% chance of success, but they would be late into the market and the PV of their receipts they estimate at Sh.4.8 million, including the expenditure of Sh.400,000 on acquiring extra product data during the second year of delay, and the chance of a successful development would be 90%. At this point, however, the mixer could only come on the market at the four or five year point from now. Required: Using a decision tree approach, advise the company on the course of action to adopt. (20 marks) NUMBER FIVE The AMARK Weapons Lid. desires to submit a tender for 32 "string-to-surface" rockets required by Skyrock Led. it is estimated that each rocket will cost approximately Sh.40,000,000 for material and variable overhead costs. Total fixed costs will amount to approximately Sh.1,600,000 over the two years it will take to build the rockets all of which would have to be recovered against this contract. The company, as a result of past experience, anticipates it could expect a 75 per cent learning curve and that the steady state would not be achieved during this production run. Building the first rocket would require approximately 400,000 hours of direct labour at a direct labour cost of Sh.150 per hour. Variable overhead costs which vary with direct labour amount to Sh.50 per direct labour hour.Eight rockets will be built during the first year of the contract and the remaining 24 will be completed during the second year. The AMARK Weapons Led. always adds 25 per cent profit margin to the estimated costs of the contract for which they tender. Required: a) Calculate the total labour hours that will be required to build the 32 rockets. (5 marks) b) Draw up a quotation showing the total price to be quoted, with details of the constituent parts of the cost structure and the profit added. (5 marks) c) Assuming the contract is awarded to the company, and no costs are deferred over the two-year period, draft estimated income statements for the first and second years of the contract life. Revenue is to be recognized on the basis of completed rockets. Fixed costs are incurred equally each year (5 marks) (Total: 15 marks)