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ASSIGNMENT

Assignment

Assignment

Part A

1.  Original costing method

Calculation of the overhead recovery rate

Total direct-labour hours = (20,000 x 0.5) + (1,000 x 1) + (10,000 x 1) = 21,000

Overhead recovery rate = £4,410,000/21,000 = £210 per direct-labour hour.

Mini

£

Medio

£

Major   £

Material cost

Direct- work cost (£8 per hour)

Total cost per unit

Profit margin (20% of TC)

25

4

105

134

26.8

160.8

62.5

8

210

280.5

56.1

336.6

105

8

210

323

64.6

387.6

2. Activity-based costing method

Total cost and trading prices         Mini       Medio   Major

Variable Costs                                          29                    70.50              113.00

Fixed Costs Machining                   1,112,000 (40%)      417,000 (15%) 1,251,000 (45%)

Logistics                                277,300 (47%)       35,400 (6%)        277,300 (47%)     Establishment          436,800 (42%)      187,200 (18%)     416,000 (40%)

Total Annual Fixed Costs            2,406,100         710,100   3,074,300

Number of Units                  20,000  1,000       10,000

Fixed Costs per unit                     120.30  710.10                307.43

Total Variable and Fixed Costs     149.30                    780.60                420.43

It seems that the activity-based set about devotes us a fairer cornerstone of ascribing overheads to production. On the cornerstone of the ABC-derived numbers, it is not astonishing that the Small form was overpriced relation to the market price. At present, the mid form examines to be cost at well underneath an equitable estimation of cost. Its cost actually should be increased significantly. Large, like the Small form, appears overpriced at present. The enterprise should address going charges in the direction of those drawn from the ABC approach. At the identical time, competitors' charges should be nearly examined. The mid merchandise with a cost of £780.60 is high and administration should cease this line. There may be other matters to address but it is probable that the restricted number of purchasers for this line will either swap to the little or large forms or be lost.  However, it should be treasured that concluding an output line might not make direct cost savings. It may be the case that decreased charges for Small and Large would elaborate their sales income and the business's total profit. The enterprise should not be too keen to decrease charges if the market will accept higher ones.

PART B

For Alpha Project

EBIT

£6,600,000

£12,600,000

£15,000,000

£7,800,000

£3,000,000

Minus: Taxes

£2,244,000

£4,284,000

£5,100,000

£2,652,000

£1,020,000

Plus: Depreciation

£1,600,000

£1,600,000

£1,600,000

£1,600,000

£1,600,000

Equals: Operating Cash Flow

£5,956,000

£9,916,000

£11,500,000

£6,748,000

£3,580,000

For Gamma Project

Revenue:

£21,000,000

£36,000,000

£42,000,000

£24,000,000

£15,600,000

Initial Working Capital Requirement

£100,000

Net Working Capital Needs:

£2,100,000

£3,600,000

£4,200,000

£2,400,000

£1,560,000

Liquidation of Working Capital

£1,560,000

Change in Working Capital:

£100,000

£2,000,000

£1,500,000

£600,000

(£1,800,000)

(£2,400,000)

(c) Non-discounted payback period

£3,956,000£8,416,000£10,900,000£8,548,000£5,980,400

(£8,100,000)

(d)            NPV =   £16,731,096

(e)       IRR        =       77%

Yes.  This task should be acknowledged because the NPV = 0. and the IRR = needed rate of return. First, there is the total task risk also called project standing solely risk, which is a project's risk disregarding the detail that much of this risk will be diversified away as the task is blended with the firm's other tasks and assets.  Second, we have the project's contribution to firm risk, which is the allowance of risk that the task assists to the firm as a whole; this assess considers the detail that some of the project's risk will be diversified away as the task is blended with the firm's other tasks and assets, but disregards ...
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