THE CASE Coffee House Premium Sdn Bhd (CHP) plans to expand its business chain by investing in a unique expresso coffee maker to produce the finest coffee in the market. It is a trial project before being extended to all branches. Muhammad, a recent MBA graduate of UNITEN, is assigned to analyze the coffee maker project. The company hired him only a few weeks ago as the head of the finance department. Muhammads first task is to estimate the feasibility of the project. CHPS TARGETED PROFIT AND BREAK-EVEN POINT The invoice price of the coffee maker is RM56,000. It would require RM1,000 in shipping expenses and RM3,000 in installation costs. CHP plans to use the coffee maker for four years, and it is expected to have a salvage value of RM8,000 after that. The depreciation rate is 25% per year or uses a straight-line basis over four years. The direct labour cost related to the products is expected to be RM24,000 per year, and the other allocated fixed cost of the project is RM17,000 per year. From the discussion with Ms. Sylvia, the head of the marketing department, the unique expresso coffee maker would attract a new market segment and is expected to generate sales of 30,000 cups per year. It is estimated that the new product will sell for RM12.50 per unit, with an ingredient cost of RM6.50 per unit. Due to inflation, management projects increase the sale price and cost per unit by 3% per year. The companys tax rate is 25%. QUESTION 1 (20 MARKS) (a) Using the contribution margin format, calculate the net profit and break-even point in unit and RM from the new coffee maker project for year 1.

(b) CHP is in the process of instilling brand value as a tasty premium coffee provider, targeting its market to young executives and businessmen. They spend a massive amount for promotion and rent a few shops at exclusive places for their business. Assume that for the unique expresso coffee maker project, CHP targeted a profit of at least RM180,000 per year. i. Calculate the sales in cups and RM, to achieve the targeted profit for year 1.

ii. If the targeted sales are 30,000 cups per year, what is the new selling price per cup to achieve the targeted profit?

iii. The marketing department believes that if the selling price decrease by RM1.00 (RM11.50 per cup), the sales will increase to 45,000 cups per year. However, if the selling price is increase by RM1.00 (RM13.50), the sales can only reach 35,000 cups per year. Which option to choose? Justify your answer.

iv. Discuss the other factors that need to take into consideration in buying the espresso coffee maker.