Question 1. (49 marks Caribbean Manufacturers Ltd (CML) wants to invest in a new machine to start producing cocoa chips. The purchase price of the new machine is $6.750.000 which will have an economic life of five years. A working capital of $750,000 is required at the beginning of the project and this is estimated to increase by 4% of the previous year's manually. Management is anticipating the production of 850,000 bags of chips for the local market annually As a result of limited production capacity, the entity anticipates that there will be a decrease in the production of its famous dashon chips by 5% Annual production of the disheen chips were 100,000 units at a unit selling price of $80 and unit variable cost of S60. Fixed production cost will not be affected by the reduction in output. Each bag of coco chips will be sold for $120 and will cost $80 to produce. A previous market research has indicated that CML could gain 14% 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 S3 each Annual promotion cost of 2% of eales revenue Depreciate the machine using the straight line method. There is no residual value. . It is estimated that the working capital will be recovered at the end of the project. The required rate of return on debt is 20% and return on equity is 14% Currently the assets of the company are funded by 60% debt and 40% equity Corporation tax rate is 30% ***Depreciation is an allowable decoction for tax purposes nel present value (NPV) Required: (w) The annual operating income after tax and the operating cash flows of the project and the (34 marks) (b) Internal Rate of Return and Profitability index of the project, (7 marks) (9) A Recommendation to the management team to accept or reject the project. (2 marks) (4) Discuss the (5) factors that the entity can comater when implementing this project (6 marks) Question 2 (1 marks) ACME Inc. currently sells a product for $1,100 which results in demand being 2,000 units Management is considering increasing the price to $1.150 however a price increase will result in a decrease in demand by 200 units. The product has the following cost structure per unit: Direct material $38.00 Direct labour 51200 Direct expenses $25.00 Variable overheads $15.00 Fixed overheads 550.00 Variable selling expense $10.00 Fixed selling expenses $75.00 Management wants to know is optimal productie quantity and its maximum profits. Required: ) Determine the price equation (4 marks) (1) Determine the optimal price and quantity (4 marks) (c) Determine the optimal profits (3 marks) Question 3 (20 marks) Blue Caf makes and sells a variety of iced coffee. The main ingredients consist of ground coffee, milk and sugar. The company has a standard costing and variance system in place to control the production process. Management has observed that the sale of the iced coffee was decreasing significantly which has impacted the overall profitability of the company. The following is the standard cost information to prepare the iced coffee. $ 5.40 kg of ground coffee @ $0.80 per kg 4.32 0.30 kg of milk @ $4.00 per kg 1.20 6.60 kg of sugar @ $0.50 per kg 3.30 Total cost of production of 1 kg of iced coffee 8.82 Actual production was 102,500 kg of iced coffee. Actual costs incurred were: $ 492,000 kg of ground coffee 418,200 29,400 kg of milk 126,420 732,000 kg of sugar 351,360 (6 marks) Required: (a) Calculate the material price variance. (b) Calculate the material mix variance, (e) Calculate the yield variance. (12 marks) (2 marks)