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Kutchina Vogue is a leading manufacturer of items used in kitchens such as gas stoves, electric chimneys, ovens and so on. It has grown significantly

image text in transcribedKutchina Vogue is a leading manufacturer of items used in kitchens such as gas stoves, electric chimneys, ovens and so on. It has grown significantly under the CEO Vivaan Rajput's dynamic leadership. In line with his belief to enhance competitiveness by using research and development for launching innovative products in the market, Kutchina Vogue has recently developed a zero Maintenance Electric Chimney (known as Chimney) which is ideally suited for Indian cooking. The research and development cost of Chimney amounts to Rs. 20,000,000. To gauge the market prospects for Chimney, a market survey was conducted by Bazar Gyani, the V.P., Marketing, at an estimated cost of Rs. 500,000. The results of the survey were very positive showing a significant demand for Chimney. The survey report also indicated that Chimney could capture 8 percent of the current market size of 100,000 units of gas electric chimney. Considering the growth of satellite towns/cities and residential colonies, the market is expected to grow at 2 percent annually. The VP, Marketing suggested to the CEO that a market penetration pricing strategy would be most suitable and Chimney should be priced at Rs. 5,000 per unit in the initial year of the launch. The price could be raised in subsequent years by 5 percent annually. The marketing and administrative costs are expected to be Rs. 400,000 per year. Kutchina Vogue is presently using 6 machines acquired 3 years ago at a cost of Rs. 1,000,000 each, having a useful life of 7 years, with no salvage value. These machines are currently being used for manufacturing other types of chimneys. They could be sold for Rs. 200,000 per machine with a removal cost of Rs. 30,000 for each. The machine to manufacture Chimney is available in that market for Rs. 10,000,000 with a useful life of 4 years and salvage value of Rs. 1,000,000. It can produce other type of chimneys also. The new machine, being state of the art technology would improve the productivity of the workers as well reduce the unit variable cost of manufacturing to Rs. 600, which would increase by 5 percent annually. The table below summarizes the labor cost with the existing machine and the new equipment. Category Existing New Machine/Equipment Number Monthly Salary Number Monthly salary Skilled Labor 20 Rs. 4,000 15 Rs. 4,000 Maintenance Men 2 Rs. 6,000 1 Rs. 6,000 Floor Managers 3 Rs. 8,000 2 Rs. 8,000 The maintenance costs currently amount to Rs. 100,000 per year (existing machines). They would total Rs. 70,000 with the new equipment. The net working capital required to start production of Chimney would be Rs. 600,000. The policy of Kutchina Vogue is to pay five months' salary as compensation in case of lay-off of employees. Required: Should Kutchina Vogue launch the Chimney? Assume the following: (i) Tax, 35 percent (ii) Required rate of return, 14 percent and (iii) Straight line depreciation for tax purposes. Give the solutions in excel format.

1. Kutchina vogue is a leading manufacturer of items used in kitchens such as gas stoves, electric chimneys, ovens and so on. It has grown significantly under the CEO Vivaan Rajput's dynamic leadership. In line with his belief to enhance competitiveness by using research and development for launching innovative products in the market, Kutchina Vogue has recently developed a zero Maintenance Electric Chimney (known as Chimney) which is ideally suited for Indian cooking. The research and development cost of Chimney amounts to Rs. 20,000,000. To gauge the market prospects for Chimney, a market survey was conducted by Bazar Gyani, the V.P., Marketing, at an estimated cost of Rs. 500,000 . The results of the survey were very positive showing a significant demand for Chimney. The survey report also indicated that Chimney could capture 8 percent of the current market size of 100,000 units of gas electric chimney. Considering the growth of satellite towns/cities and residential colonies, the market is expected to grow at 2 percent annually. The VP, Marketing suggested to the CEO that a market penetration pricing strategy would be most suitable and Chimney should be priced at Rs. 5,000 per unit in the initial year of the launch. The price could be raised in subsequent years by 5 percent annually. The marketing and administrative costs are expected to be Rs. 400,000 per year. Kutchina Vogue is presently using 6 machines acquired 3 years ago at a cost of Rs. 1,000,000 each, having a useful life of 7 years, with no salvage value. These machines are currently being used for manufacturing other types of chimneys. They could be sold for Rs. 200,000 per machine with a removal cost of Rs. 30,000 for each. The machine to manufacture Chimney is available in that market for Rs. 10,000,000 with a useful life of 4 years and salvage value of Rs. 1,000,000. It can produce other type of chimneys also. The new machine, being state of the art technology would improve the productivity of the workers as well reduce the unit variable cost of manufacturing to Rs. 600 , which would increase by 5 percent annually. The table below summarizes the labor cost with the existing machine and the new equipment. The maintenance costs currently amount to Rs. 100,000 per year (existing machines). They would total Rs. 70,000 with the new equipment. The net working capital required to start production of Chimney would be Rs. 600,000 . The policy of Kutchina Vogue is to pay five months' salary as compensation in case of lay-off of employees. Required: Should Kutchina Vogue launch the Chimney? Assume the following: (i) Tax, 35 percent (ii) Required rate of return, 14 percent and (iii) Straight line depreciation for tax purposes

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