Hi, can someone help to solve the book question IM 12.7 in the attachment? Thank you very much!
12.7 Advanced: Hire of machine based on uncertain demand IM and value of perfect information. The Ruddle Co. Ltd had planned to install and, with effect from next April un Sales machinery for the production of a new product - product Zed. However, the supplier of the machinery d that delivery of the machinery will be units delayed by six months and this will mean that Ruddle will not now be able to undertake production using that machinery until The first six months of production' stated the commercial manager of Ruddle, 'are particularly crucial as we have already contracted to supply several national supermarket groups with whatever quantities of Zed they require during that period at a price of 40 per unit. Their demand is, at this stage, u have been well within the capacity of the permanent machinery we were to have installed. The best estimates of the total demand the first period are thought to be 0.1 6 urces used in the production of each unit of the product Estimated demand - first six months The normal cost per hour of labour is 0 Whatever the level of demand, we are going to meet it in full even if it means operating at a loss for the first half year. Therefore I suggest we consider the possibility of hiring equipment on which temporary production can take place.' Details of the only machines which could be hired are: nsidering the effects of the current venture Machine A Machine B Machine C is expected to be 800 hours of idle time for each grade of r in quarter II. Idle time is paid at the normal rates. Material X is in stock at a book value of 8 per unit, but is idely used witrer e firm and any usage for the purposes of eplacing. Replacement cost is 9 per stack. There are 16000 units in stock er unit and any stock not used will have E5 to Warren, of 2 per unit. Further ix months 320000 350000 400000 In addition to the above costs, there will be a variable material cost of 5 per unit. For purchases greater than 10000 units a discount of 20 per cent per unit will be given, but this only applies to the excess over 10000 units. 10 per direct labour hour worked E3 per direct labour hour worke Should production capacity be less than demand then Ruddle could subcontract production of up to 6000 units but would be required to supply raw materials. Subcontracting costs are Total fixed ovi not alter as a result of the current Feedback fron: auvertising will enable the exact demand to be determined at the end of quarter I and production in quarter II will be set to equal that demand. However, it is necessary to decide now on the sales price in order that it can be incorporated into the up to 4000 units subcontracted 30 per unit any excess over 4000 units subcontracted 35 per unit. These subcontracting costs relate only to the work carried out by the subcontractor and exclude the costs of raw materials. The commercial manager makes the following further points sales price and on the basis of this advise Warren of its explain why the management of Warren might cted money value and prefer one of the other sales ted money value of the venture at each Due to the lead time required for setting up production, the choice of which machine to hire must be made before the precise demand (12 marks) is known. However, demand will be known in time for production to be scheduled so that an equal number of units can be produced rationally reject the sales price leading to the highest each month. We will, of course, only produce sufficient to mee 4 marks)We need to decide which machine to hire. However, I wonder c) It will be possible, for the sales price of 40 per unit only, to ascertain which of the four levels of demand will eventuate. If the indications are that the demand will be low then the advertising campaign can be cancelled at a cost of 10000 but it would then not be possible to continue the venture at whether it would be worthwhile seeking the assistance of a firm of market researchers? Their reputation suggests that they are very accurate and they may be able to inform us whether demand is to be 10, 14 or 16 thousand units enother sales price. This accurate information concerni ng demand will cost 5000 to obtain (a) For each of the three machines that could be hired show the ndicate whether it is worthwhile obtaining the information and scertain whether it would alter the advice given in (a) above possible monetary outcomes and, using expected values advise Ruddle on its best course of action (b) (i) Calculate the maximum amount which it would be ACCA Level 2 Management Accounting worthwhile to pay to the firm of market researchers to
