Question
Use the following information to answer all questions: Management of XYZ are considering investing in a new business line for producing a new product. The
Use the following information to answer all questions: |
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Management of XYZ are considering investing in a new business line for producing a new product. The following data are relevant to the business line: | |||
1 | Business line machinery will cost $1,000,000 and have 10 years useful life and requires $50,000 maintenance annually | ||
2 | Line will have a normal capacity to produce 100,000 units annually | ||
3 | The line will be based in a factory rented and used by XYZ at $100,000 of which 40% will be allocated and charged to the business line. | ||
4 | Below are the materials used in producing the product: | ||
|
| Quantity | Cost |
| RM1 | 0.1 KG | $200 per KG |
| RM2 | 1 piece | $100 per box of 20 pieces |
5 | Salaries are paid as follows: | ||
| Head office salaries | $100,000 | annually |
| Factory labor | $200,000 | annually |
| Sales staff | $120,000 | annually |
6 | XYZ will charge the business line $50,000 annually for Administration services (such as accounting, HR and other service) | ||
7 | At the end of year 5, the business line will be closed and the machinery will be sold to a third party for $450,000 | ||
8 | The investment and required working capital will be financed with 60% equity and 40% debt. | ||
9 | The new line is planned to produce and sell 50,000 units in year 1, 60,000 units in year 2 growing by 10% for the remaining years | ||
10 | Selling price for the product will be $50 per unit expected to rise by 10% starting year 3 | ||
11 | Raw materials are imported from a foreign country and their prices are expected to increase by an annual inflation rate of 7% | ||
12 | Working Capital: | ||
| Sales are 20% cash and 80% credit due within 60 days | ||
| Raw Material purchase are made on credit due within 30 days | ||
| Factory rent is paid in advance on December 31 of each year | ||
13 | The company's dividend policy is 40% of net profit starting year 2 for this project (i.e. no dividend on year 1 net profit) | ||
14 | Cash balance should be minimum of100,000 |
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15 | Debt to be paid over 2 years |
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The gross margin for year 1 is :
a.860.000
b.1.640.000
c.1.005.000
d.835.000
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