Question 1

YUKAA PLC is considering a project with the following most likely cash flows

Years Purchase Running Savings costs costs 

K’000       K’000                 K’000

                        0               (7,000)

1.              2,000                6,000

2.              2,500                7,000

The cost of capital for the project is 8%.

Required:

1. Measure the sensitivity (in percentages) of the project to changes in the levels of expected costs and savings.
2. Suggest the possible drawbacks of sensitivity analysis

Question 2

Lenco Ltd has begun to produce a new product, called Sigma for which the following cost estimates have been made:

	K'000
Direct Materials	27
Direct Labour (5 hrs@K6000)	30
Variable production Overheads (5hrs at K2,500)	25
Total variable cost	82

Production fixed overheads are budgeted at K30 million per month and budgeted direct labour hours are 25,000 per month. The absorption rate will be based on labour hours. The company wishes to make a profit of 20% on full production cost from product Sigma.

Required

1. Ascertain the full cost-plus based price.
2. Ascertain the marginal cost-plus based price