Q1: The following are annual budgeted amounts for a manufacturer for the coming year (a normal year):

Total budgeted annual overheads costRM8,000,000

The activity pools which give rise to this annual overhead cost consist of:

- Procurement activity pool RM1,500,000 (budgeted 150 purchase orders per year)

- Production setup pool RM500,000 (budgeted 500 setups per year)

- Production activity pool RM 4,000,000 (budgeted 400,000 DLH per year)

- Marketing and Distribution activity pool RM2,000,000 (budgeted 20,000 salesman hours per year)

The company produces 10,000 units of Product A annually with the following unit costs: direct materials RM10, direct labour 2 hours.

Required:

a) Calculate the unit cost of Product A using volume based costing with DLH as the cost driver.

b) To produce and sell 10,000 units of Product A requires 10 purchase orders, 20 setups, 20,000 DLH, 200 salesman hours. Calculate the unit cost of Product A using Activity-Based Costing (ABC).

Question 2

A manufacturer intends to purchase a new production machine costing RM700,000 (price inclusive of freight), requires RM10,000 installation cost, and RM40,000 training costs. Total annual running and maintenance cost amounted to RM120,000, and annual revenue generated is expected to be RM320,000. Additional working capital of RM10,000 is required at the start of the project, and fully recovered at the end of its 5 year useful life.The company has an effective tax rate of 20% and cost of capital of 10% per annum.

Required:

a) By discounting the future after-tax cash flows, calculate the net present value (NPV) of the project.

(Refer to NPV tables for the discount factors.)

b) Should the production machine be purchased?

c) State all your assumptions.